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The plans will aim to help cut costs for businesses, simplify rules for users and allow regulators to act more quickly to protect consumers.
The UK government has published a press release committing it to reform the Consumer Credit Act, which came into force in 1974, and regulates credit cards and personal loans.
In the statement, the government calls the existing legislation “highly prescriptive and increasingly cumbersome and inflexible”, which is “confusing consumers” and “adding unnecessary costs to businesses”.
The government is expected to move much of the existing act from statute to sit under the Financial Conduct Authority (FCA), allowing the regulator to respond more quickly to emerging developments in the consumer credit market.
Reform is also expected to simplify ambiguous, technical terms to “make it clear to consumers what protections they have”, and make it “easier and more cost effective for businesses to comply with regulation”.
This aligns with the Woolard report from February 2021, which said “many recent rules have focussed on specific products” that, although very much favoured by firms, has the potential to create inconsistency.
This could result in different “regulatory approaches giving advantages to one form of credit over another”, despite customers not necessarily using them differently.
John Glen, economic secretary to the Treasury, said: “The Consumer Credit Act has been in place for almost 50 years — and it needs to be reformed to keep pace with the modern world.
“We want to create a regulatory regime that fosters innovation but also maintains high levels of consumer protection.
“That’s why I have committed to undertake this ambitious long-term reform — and it’s exactly what I’ll deliver.”
A consultation on the direction of this reform is expected to be published by the end of the year.
One potential change could be tightening the rules that allow buy now, pay later (BNPL) firms to be excluded from consumer credit regulations.
For example, the UK’s Consumer Credit Act (CCA) has an exemption in place designed to allow the delayed payment of goods and services as long as that delay is time-limited and does not involve the charging of interest.
This exemption is in place to ensure that invoicing does not fall within the definition of regulated consumer credit. However, it has also provided cover for BNPL arrangements whereby goods are paid for through a number of short-term instalments.
Back in February, experts spoke to VIXIO and speculated on how BNPL could be brought into the regulatory fold.
According to Katie Fry-Paul, a financial regulation associate at Taylor Wessing, speaking at the time: “Although at the moment, we don't know how regulation of BNPL firms will be achieved, we do expect that the exemption that they currently use will be amended to bring them inside the regulatory perimeter and that will require amendments to legislation."
Cost of living guidance
At the same time, the FCA has sent a Dear CEO letter to 3,500 lenders, calling on them to “understand the changing pressures on consumers”, particularly those least able to bear higher increased credit costs from higher interest rates.
The letter asks firms to treat their customers fairly and according to the FCA’s principles, laying out specific expectations, including:
- Providing customers with the level of support appropriate to them.
- Making those in difficulty aware of free debt advice.
- Ensuring fair fees that only cover costs.
- Taking into account the financial pressure new borrowers may be facing when taking on new customers.
- Helping customers not fall victim to scams.
The letter also makes specific reference to the BNPL sector, given its unregulated status, “strongly encourag[ing]" them to also follow the guidance.
Additionally, the FCA mentions its findings on borrowers in financial difficulty will likely be published later this year, with plans to consult on tailored support guidance that may include changes to the FCA Handbook.
