Sun 19 Jun 2022

A big week for Consumer Finance: CCA Reform and Cost of Living Update

On 16 June 2022 the FCA announced that it would be writing to 3,500 lenders to "remind them of the standards they should meet as consumers across the country are affected by the rising cost of living."  

The Dear CEO letters should not have come as a surprise to financial services firms. Firms are already subject to regulatory obligations to treat customers fairly and in May the FCA told the Building Societies Annual Conference that they expected firms to help customers struggling through the cost of living crisis. That said, the breath of scope may be more than some firms anticipated. The Dear CEO Letters cover the following key areas:

  • The rising cost of living – acting now to support consumers
  • Understanding the changing pressures on consumers
  • Consumers in vulnerable circumstances are feeling the greatest impact
  • Treating borrowers fairly
  • FCA expectations of firms
  • Findings from the FCA review of outcomes for borrowers in financial difficulty
  • Embedding the Vulnerable Customer Guidance
  • Relevance to small business customers
  • Relevance to buy now pay later (BNPL) customers
  • Next steps

When the FCA spoke out in May inflation was (believed to be) 7% and the base rate was 1%. In reality inflation hit a 40-year high of 9% in April. There is a time lag on inflation figures, therefore consumers could be experiencing a rate of 10-11% already. The base rate increased to 1.25% on 15 June 2022 with the next rate review on 4 August 2022. Against this backdrop you can see why the FCA has said that:

With household bills expected to continue to rise into the autumn, it is important that firms act now to make sure borrowers struggling with payments and customers in vulnerable circumstances can access the help they need.

On the same day as the Dear CEO Letters were announced, the UK Government committed to the reforming the Consumer Credit Act (CCA). The CCA has been around since 1974 and includes a number of sanctions that financial services firms argue are draconian. Numerous provisions in the CCA impede the ability of firms to deliver good customer outcomes. The prescriptiveness of the CCA can often put firms in a position where they feel they are at odds with the high level principles on fairness in trying to ensure their agreements are enforceable.

It is hoped that simplifying the rules will bring benefits for consumers and businesses. Firms hopes of reform were dashed after the Review of retained provisions of the Consumer Credit Act: Final report. This time round there is a lot of excitement in the industry about the prospect of reform really happening. It is hoped that moving the CCA from statute to the FCA Handbook will mean that consumer credit rules keep up with emerging best practice and prevent conflict with other regulatory obligations such as the Consumer Duty.

Of course there will be a long way to go to make reform a reality. We expect a consultation paper from HMT by the end of the year. Hopefully it is full steam ahead after that!

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