All change in Consumer Credit: 'Ambitious' Consumer Credit Act reform, regulation of BNPL, the Consumer Duty, and much more...

The biggest changes are coming to the consumer credit industry since the FCA took over the regulation of the sector from the OFT in 2014. The sector is by far the largest that the FCA supervises in terms of the number of firms (around 40,000 firms), which will only increase when its remit extends to Buy Now Pay Later (BNPL). The FCA was clear in the Woolard Review that, in extending regulation to BNPL lenders, it was also taking the opportunity to complete a holistic review of how it regulates the unsecured credit market.

We take a look at some of the incoming developments that will have the biggest impact on the industry - as well as other external factors affecting the market currently.

Buy Now Pay Later - get ready for regulation!

BNPL is a simple concept - it is instalment credit that allows borrowers to split the cost of purchases into regular repayments without paying interest. BNPL lenders usually derive revenue from merchant fees, which are usually a percentage of the purchase price.  The Woolard Review described an “urgent need” to regulate BNPL credit due to a number of areas of potential consumer detriment. The government responded by launching a consultation in October 2021 and it published its consultation response on 20 June 2022, in which it stated draft legislation will be published around the end of the year, secondary legislation will be introduced in around mid-2023 with an FCA consultation on its rules for BNPL credit to follow. The government is also considering a transitional regime for BNPL.It is initially proposed that the scope of regulation will include both BNPL options provided by third party lenders (whether in store or at a distance) as well as BNPL that is provided directly by merchants to customers where it is not sold face-to-face. However, the government has not made a final decision on BNPL credit provided by merchants at a distance and so has asked for further responses on this by 1 August 2022.It is worth noting that the small agreements provisions in section 17 of the Consumer Credit Act 1974 will be disapplied so that BNPL agreements of less than £50 will be regulated. The government is also considering anti-avoidance measures, including whether it needs to prevent firms using the exemption in article 60F(3) for certain types of running account credit.The government proposes the following arrangements should be exempt from new regulation:

• Invoicing arrangements that allow for deferred payment
• Interest-free agreements that finance contracts of insurance
• Charge cards (such as some American Express cards)
• Trade credit
• Employer/employee lending

The regime will include advertising and promotions being subject to the financial promotions regime, creditworthiness assessments, FCA rules being applied on arrears and default, section 75 applying to BNPL agreements and the FOS jurisdiction being extended to BNPL.The government concluded that BNPL products are inherently lower risk that interest-bearing credit products. As such, the government is intending to introduce more relaxed rules for BNPL, including:

• Exempting merchants that offer BNPL credit provided by third party lenders from FCA regulation as credit brokers
• Disapplying certain provisions of the Consumer Credit Act 1974 to deliver a bespoke regime in respect of pre-contractual information and form and content requirements for BNPL agreements (however the current provisions on improper execution will apply)
• Changing the time periods for post-contractual information (such as NOSIAs) to make these more suitable for BNPL agreements

In the meantime, the FCA is encouraging BNPL providers to address potentially unfair and unclear contract terms in their credit agreements and to mitigate the associated risk of harm to consumers. Following this, four BNPL providers voluntarily decided to amend the terms of their credit agreements, in particular in respect of cancellation, suspension, set-off and continuous payment authority terms.In the Financial Services Regulation team at Freeths, we have experts that focus on consumer credit who have experience advising BNPL clients on: the impact of the Woolard Review, their contract terms, use of continuous payment authorities and debt collection processes. We also have recent experience advising clients in sectors that are new to FCA regulation and supporting our clients to become 'ready, willing and organised' for FCA regulation. We regularly advise clients in the regulated consumer credit industry on a range of compliance issues and so are able to assist clients in the BNPL sector in becoming authorised and on implementing the necessary systems, controls and documentation.We have also drafted a more in-depth review of the BNPL consultation response here.

'Ambitious' Consumer Credit Act 1974 (CCA) reform - long overdue?

The government has announced its intention to “progress ambitious reform of the CCA”, on which it will conduct a public consultation later this year. The government accepted in its announcement that the current regime is “dated”.A review of the consumer credit regime is long overdue. The availability of credit, use of technology and consumer attitudes were very different in 1974 to the present day. The regime has also been amended over the years, including repealing and/or replacing numerous sections of the CCA when the regime was transferred from the OFT to the FCA in 2014 and brought within the Financial Services and Markets Act 2000 regime. This, combined with further amendments due to EU legislation, has led to a patchwork of legislation, regulations and rules that is not fit for purpose in the modern, technologically enabled world of credit.The Woolard Review suggested wider reforms than those suggestions limited to BNPL, suggesting reform is required to ensure the unsecured credit industry works to provide good outcomes for consumers, is fit for purpose and is proportionate. The government consultation on BNPL also received responses that suggested wider reform was required as a tailored regime for BNPL would impact competition across the wider market. The government responded in the BNPL consultation by stating that as reform of the CCA 1974 would be “complex and lengthy” it would first progress BNPL regulation, with the CCA 1974 review to follow.One area of the consumer credit regime that the government has committed to reviewing is the pre-contractual information requirements. The review will:

• Move a lot of CCA provisions from statute to the FCA Handbook, which should allow the FCA to more quickly develop its rules in reaction to changes in the market
• Simplify the technical language that is currently used to make it easier to understand for consumers and more cost-effective for businesses
• Consider repealing or replacing retained EU legislation
• Consider rules that enable lenders to provide a wider range of finance (e.g. for emerging and new technologies) whilst maintaining high levels of consumer protection

We encourage firms to keep abreast of the proposed changes and to engage with the consultations. We can assist firms by advising on consultation responses and the potential impact of the proposed regulatory change. We will also assist firms across the sector in implementing the new regime once it is brought into effect.

Consumer Duty of Care

The new Consumer Duty is on the horizon and will apply to the consumer credit industry, imposing a higher standard of care than the FCA's existing Principles 6 and 7. The FCA is expected to publish the policy statement summarising responses to its second consultation and to make any new rules by 31 July 2022.The Consumer Duty will be defined as a duty to “deliver good outcomes for retail clients”. The duty will be backed by cross-cutting rules which will require firms to:

• act in good faith
• avoid causing foreseeable harm to retail customers
• enable customers to pursue their financial objectives

The FCA has also introduced four outcomes underpinning the Consumer Duty as follows:

• Communications equip consumers to make effective, timely and properly informed decisions about financial products and services
• Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet
• Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance
• The price of products and services represents fair value for consumers

The FCA has stated that its implementation of the Consumer Duty will be “iterative” so firms will need to continually consider their approach to the new Consumer Duty.We can assist firms by advising on their systems, controls, policies, procedures and other documentation so that the firm can demonstrate compliance with the new Consumer Duty. We have drafted a more in-depth review of the FCA's second consultation on the Consumer Duty here.

How the cost of living crisis may affect lenders

The FCA wrote a 'Dear CEO' letter on 16 June 2022 to over 3,500 lenders to address the impact of the rising cost of living on consumers by reminding them of the FCA's expectations. The letter highlighted many key themes that the FCA is focussing on now, such as treating customers fairly (TCF) - including those in financial difficulty, the treatment of vulnerable customers (thge it is anticipated that the number of vulnerable customers may increase given the rising cost of living), and the fairness of fees and charges imposed on customers. The FCA has also urged BNPL firms to follow this guidance.The FCA followed this up with another 'Dear CEO' letter on 27 June 2022 to firms in the Mainstream Consumer Credit Lenders (MCCL) portfolio focussing on its supervisory strategy for the portfolio. Again, this focused on the rising cost of living, pointing out that those less able to bear the rises will be the hardest hit, and this coupled with rising interest rates will likely lead to borrowing becoming less affordable or unsuitable for some and to a wider group of customers in financial difficulty (some of which will be vulnerable). The FCA highlighted four key risks:

• Treatment of borrowers in financial difficulty
• Inadequate affordability assessments
• Persistent debt strategies being insufficient
• Firms not dealing with section 75 liabilities appropriately

The FCA also highlighted additional areas of interest, including the changing ways of working and a move toward automated processes, oversight of third party outsourcing, data-led regulation, the new Consumer Duty, fair treatment of vulnerable customers and environmental, social and governance (ESG) strategy.We recommend lenders take this opportunity to review their policies and processes, in particular their vulnerable customer policy, affordability assessments and debt collection processes.

Make sure your financial promotions are compliant

The FCA has also recently issued a 'Dear CEO' letter to credit brokers, firms offering high-cost lending products and other firms involved in these activities to ensure that their financial promotions are clear, fair and not misleading. This includes clearly including a status disclosure (for example, whether the firm is acting as a credit broker or a lender), including sufficient risk warnings and avoiding phrases that indicate credit is available regardless of the borrower's financial circumstances.We recommend firms across the consumer credit sector take this opportunity to conduct a wholesale review of their financial promotions.

Commissions

There have been multiple developments in this area over the past few years which are a result of the FCA's ongoing focus on broker commissions. Due to this, we have noticed increased activity from claims management companies and claimant law firms bringing claims against firms based on undisclosed commissions and allegations of mis-selling and unfairness.Many cases we see still reference the 2019 FCA report on the motor finance sector (which led to a ban on motor finance discretionary commission models), as well as the decision of the Court of Appeal in May 2021 in which it found that a fiduciary relationship is not a necessary pre-condition for all undisclosed commission claims.[1]We have experience in acting for firms in robustly and successfully rebutting claims and complaints brought on this basis, as well as advising on risk and compliance measures to assist firms in avoiding such claims being brought in the future.

How we can help

Our financial services regulation team acts for clients across the consumer finance sector, including a wide range of lenders and brokers. Our team advise on a wide range of consumer finance documentation, including pre and post-contractual documentation and have experience drafting appropriate policies and processes to meet FCA requirements. Our team also has experience in preparing firms for regulation by the FCA, including assisting with applications for authorisation and ensuring the correct systems, controls and policies are in place. For regulated firms, we provide ongoing compliance advice, including on complying with the Consumer Credit Act 1974, the financial promotions regime and the FCA Handbook rules, including MCOB and CONC.If you have any queries in relation to consumer finance, please contact Adam Edwards or Daniel Meyer.[1] Pengelly v Business Mortgage Finance 4 Plc [2020] EWHC 2002 (CH)