The coalition’s ‘Our programme for Government’ states that it is based around three fundamental principles: freedom, fairness and responsibility. While these principles are not described in detail, they could reflect a balanced approach if construed as follows: the freedom of enterprises (and indeed the need for them) to compete; the responsibility of creditors to treat fairly all those with whom they deal as customers; and the responsibility that must fall to some degree on individuals when taking borrowing decisions to understand the consequences of their act.
However, this potentially logical and balanced approach seems to have been subverted by the coalition government’s desire to be seen to address failings that go well beyond the consumer finance system and be taking action on behalf of consumers who are presented as being misled or being unwilling purchasers of services. Political dogma appears to have overtaken a rational and considered approach.
Ironically, the reality is that there has already been a host of recent measures intended to control the activities of those lending money in the consumer finance market on the one hand, and providing additional consumer protection and education opportunities on the other. The past five years have seen some fairly fundamental changes in the way in which the Consumer Credit Act 1974 (which, contrary to the date of the act, only fully came into force in May 1985) should be applied that have radically changed its scope and impact.
RECENT CHANGES
First, in 2008 a large set of new information requirements were imposed on businesses to keep customers more closely informed as to the state of their accounts and what they should and should not do when facing arrears under the Consumer Credit Act 2006 (the 2006 Act). The cost to industry of implementing these changes was in excess of £500m. Secondly, under the same legislation, the court was given unfettered powers to reopen and rewrite relationships that it considered to be unfair, whether from the terms that applied contractually or the behaviour of the lender involved. It is interesting to note that while this right has been frequently pleaded in recent years on behalf of consumers, the courts have rarely felt consumers have been treated unfairly. Thirdly, the Office of Fair Trading (OFT) was granted unlimited power to specify what it considered to be ‘unfair or improper’ business practices and issued guidance setting out what it meant in practice. There is now detailed guidance from the OFT on what behaviour they consider reflects irresponsible lending together with several ‘requirements’ imposed on lenders’ licenses to show that the OFT treat this as more than a simple academic exercise. Finally, on top of this UK initiated endeavour, there are the provisions of the Consumer Credit Directive (CCD), which took effect in full on 1 February 2011. This has, in particular, put in place far greater emphasis on the amount of information that has to be given to consumers at the pre-contract stage, giving them a right to withdraw on 14 days’ notice without penalty in all cases and provided additional post-contract information rights.
It could be thought that, given the potential impact of all these steps, a logical approach would be to stand back and see how they are shaping and changing the lending behaviour of creditors, and the attitudes and approach to borrowing of consumers. However, given the political imperatives the coalition feels it is under, quite the opposite approach has been taken. Under the coalition government, the following consultation exercises have been issued:
- the HM Treasury paper, ‘A New Approach to Financial Regulation: judgment, focus and stability’, issued in July 2010 (the primary focus of this is addressing the issues that led to the banking crisis);
- the HM Treasury and Department for Business and Innovation and Skills (BIS) call for evidence linked to ‘managing, borrowing and dealing with debt’ issued in October 2010; and
- the HM Treasury and BIS, ‘A new approach to financial regulation: consultation on reforming the consumer credit regime’, issued in December 2010.
The consequence of the latter paper is that the consumer credit regime may move to a brand new rules and principles regime under the auspices of a new Financial Conduct Authority (FLA), in which case the even greater constraints arising from two further consultation papers issued in February 2011 may apply. These are ‘A new approach to financial regulations: building a stronger system’ and the Financial Services Authority’s discussion paper DP11/1 on product intervention.
Given the actual legislative changes that have already been introduced, the effect of which have yet to be assessed, a key question to be asked is — do these additional proposals reflect the coalition government’s principles of freedom, fairness and responsibility? An examination of their terms and the rationale for them gives rise to some interesting conclusions.
The HM Treasury paper ‘A new approach to financial regulation: judgment, focus and stability’ focuses on the broader issues arising from the banking crisis. The issue of concerns or lack of them around the consumer finance market and industry was not therefore given undue consideration, although the paper did recognise the need to balance the protection of consumers and the promotion of confidence in the integrity and efficiency of UK financial markets.
The HM Treasury and BIS call for evidence in support of the consumer credit and personal insolvency review does reflect a more knee-jerk politically driven reaction. The foreword contains helpful and balanced statements such as:
‘We need a new approach to regulation, one which focuses on encouraging consumers and lenders to take responsible lending decisions rather than dictating the precise terms of every credit agreement in every circumstance. Empowered consumers can make more informed decisions on whether to borrow and who to borrow from.’
Unfortunately, the paper then becomes rather more overt in its politically driven approach. Rather than trying to assess the current state of the market and how things have changed and may be changing, it then immediately starts to drive political messages. It notes that the debt-to-income ratio has risen from 95% in 2000 to 145% today. However, it does not then recognise that in 2010 consumer credit lending fell by approximately 6% as a whole and in some areas there were much more marked falls, eg 24% in the case of unsecured personal loans. This reflects a desire to drive a political agenda rather than really understand the current state of the market and the nascent effect of recent legislative changes already introduced. This political agenda is reflected in some of the areas covered by the call for evidence. These include impulse buying through the use of store cards, high-cost credit, and interest rate caps on credit and store cards (the latter is a concept that the OFT has considered and rejected on several occasions in recent years). A key focus is the personal insolvency review section, ie how to address the needs of those already in debt. A better and more balanced approach, which may yield a long-term solution, would have been to focus on what form of education systems would obviate a repeat of the situation arising in the future.
The HM Treasury and BIS consultation on reforming the consumer credit regime again reflects an approach whereby the stated approach is laudable but then subverted by the messages that follow. In this consultation the key objectives are stated to be:
- effective and appropriate consumer protection, including through a responsive and flexible framework;
- clarity, coherence and improved market oversight;
- opportunities for simplification and deregulation; and
- a proportionate and cost-effective regime.
However, any balanced approach is thwarted by the government, immediately limiting the proposals to be considered to two very specific choices. First, moving to a totally new principles and rules-based regime to operate under the FCA or alternatively, retaining the 2006 Act regime under the auspices of a body to be determined (given the changes that will apply to the OFT’s role and that have already started). This simplistic two facet approach confuses two fundamental issues. While there may be real merit in having one body overseeing all retail financial services in the form of the FCA, this does not justify a proposal to immediately consider a rewrite of the whole of the consumer credit regime.
CONSEQUENCES
The government’s desire to drive a specific agenda is clear but again an inherent confusion over the right model for any solution is apparent in the text. It states:
‘A healthy consumer credit market which serves businesses and consumers well is essential to economic recovering growth: and a key element of a healthy consumer credit market is effective regulation.’
While this appears to reflect a potential for whole scale review on a balanced basis so that over regulation can be simplified where it is shown to provide no consumer benefit, the consultation does not then develop or demonstrate the case for a totally new regulatory regime as opposed to the case for a single conduct regulator.
The position is probably best summed up by the government’s approach in relation to the proportionality and cost-effectiveness objective. While this would potentially reflect a desire to implement competition and balance within the market, this is clearly not what the government has in mind. In relation to this principle they state:
‘A new regime should be proportionate and fair, with the resources within the regulatory regime allocated effectively.’
The scale and cost of regulatory resource should be driven by the outputs that regime may deliver. Where there is no effective assessment of the adequacy of the current regime (especially before the effect of the recent changes can be sensibly assessed) how can an alternative model be meaningfully judged to be necessary? The real potential cost to industry (and consequently to consumers, as it is consumers who will bear this cost ultimately) is frankly brushed under the carpet in this consultation.
It is interesting to note that on 20 December 2010 the government announced news of principles it will use when introducing European measures into UK law. They said their aim is to end ‘gold-plating’ so that ‘British businesses are not put at a disadvantage relative to their European competitors’. The UK government’s implementation of the CCD was an extreme example of this gold-plating. While this implementation was under the auspices of the previous government, it is interesting to note that in the consultation on reforming the consumer credit regime, no mention is made of reversing the expensive overregulation introduced unnecessarily when implementing the CCD.
What the consultation does is stress the government’s current belief that regulation is the way to drive markets with competition between providers and education of consumers having a very secondary role. It states:
‘A key cornerstone of any transfer of responsibility for consumer credit would be to at least maintain – and where possible strengthen – overall levels of consumer protection, while recognising the role of consumer responsibility and that all risk will not be eliminated.’
CONCLUSION
It seems plain that the coalition government is currently set on a course to use increased regulation to deliver fairness, with limited interest in enhancing competitiveness in the market and developing consumer responsibility.
It can only be hoped that the robust response from the consumer finance industry as a whole may lead to a more considered approach.