FCA review of retained CCA 1974 provisions: leave the champagne on ice for now...

Anyone who has pressed (or hoped) for reform of the current UK consumer credit regime is likely to be disappointed by the FCA's eagerly awaited interim report on its review of the Consumer Credit Act retained provisions.  While there appears to be a general reluctance to make many changes, one glimmer of hope for consumer credit firms is a possible change to limit the sanctions for breach of information requirements to cases where the breach has caused material harm.

Sanctions for breaches of information requirements: a question of proportionality

The FCA thinks that the ‘self-policing’ nature of the automatic sanction of unenforceability should be retained, as it has a significant effect on firm conduct and on consumer protection.  Likewise with disentitlement to interest because it provides an extra incentive for firms to comply where there is a particular risk of harm to vulnerable customers.

However, the FCA recognises that there has been an issue with the proportionality of the sanctions in relation to breaches of the CCA information requirements.  Feedback from industry emphasised that they can apply where a breach is relatively technical and minor, resulting in costs that are disproportionate to the intended deterrent effect.

Existing mitigation inadequate

A specific provision was introduced into the relevant CCA regulations to address this problem. It provides that, where a notice or statement contains an error or omission which does not affect the substance of the required information or forms of wording, the notice or statement does not breach the regulations on this ground alone.  Understandably, however, firms are reluctant to take the risk of relying on this given uncertainties over its interpretation and a lack of guidance from the courts as to which defects fall within its scope (but judicial clarity as to the serious consequences if a breach doesn't fall within it).

FCA rules to replace information requirements?

The FCA is considering transferring the retained information requirements to FCA rules to ease the process of amendment and updating, but keeping the sanctions in the CCA (or other legislation).  Its thinking is that, if this is done, firms may have greater clarity over the meaning of relevant requirements and what is needed to comply, and the risk of inadvertent non-compliance should be reduced.  Nonetheless, there may still be cases where breaches of the information obligations take place due to misunderstanding of the relevant provisions, or uncertainties over how they apply in a particular situation.

A more nuanced approach to sanctions?

The FCA suggests that if a breach is substantive but unlikely to cause consumer harm, the sanctions should perhaps be disapplied; it should be sufficient to rely on FCA disciplinary powers and the FSMA private right of action.

It is also open to the idea of narrowing the scope of application of the sanctions to apply only to breaches that are likely to cause material harm.  However, its final position is very much up in the air.

Where would the bar be set for breaches likely to cause "material harm"?

By way of example, the FCA suggests that breach of FCA rules could attract unenforceability only if certain prescribed terms are missing or substantively wrong, or only if the prescribed statement or notice is not issued at all, or not remedied, within a specified period.  Other breaches would attract the possibility of disciplinary sanctions and private right of action, but would not result in unenforceability.

The FCA proposes that it could split the unenforceability and disentitlement sanctions for annual statements and arrears notices, so that disentitlement applies only in a small sub-set of cases giving rise to unenforceability. In this way, the sanction would only apply to serious breaches which are most likely to cause harm.

Next steps – FCA stakeholder events

The consultation period closes on 2 November 2018.  The FCA will be holding stakeholder events in September and October to discuss the issues more widely.  Firms wanting to attend should email CCAreview@fca.org.uk to express their interest by 31 August 2018. Following this, the FCA will review the responses to the interim report. It also plans to conduct further research to feed into the final report, which it will publish before the statutory deadline on 1 April 2019.

With Brexit looming on the horizon, consumer credit firms shouldn't hold their breath for the FCA to implement any of its proposed changes any time soon.

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