A radical upgrade of consumer credit regulations is long overdue

Last month the Financial Conduct Authority turned ten years old. In that time it has overseen a trailblazing drive to outcomes-based regulation that has enabled innovation to thrive, with its world-leading Fintech sector attracting over $12bn in investment in 2022 alone.

Despite this success, one critical area of regulation has remained stuck in the mud: consumer credit regulation, and specifically the UK’s Consumer Credit Act (CCA). Compared to the FCA, the main regulation overseeing consumer lending in the UK is a positively middle-aged 49-year-old.

Perhaps few other activities are as empowering and nerve-racking as taking out a loan. A mortgage remains aspirational for many, despite the well-covered housing affordability crisis. Credit can help someone start a business, buy a car, or afford a Masters.

With so much at stake, robust, proportionate regulation is vital. But right now, regulation is failing consumers every step of the way.

The CCA Is Failing Consumers And Lenders

In the first place, regulation has failed to keep up with digital technologies and the reality of how many sign up to loans in the first place. Are we seriously suggesting that unwieldy legalese in terms and conditions is the best way to inform applicants? Why not allow flexibility for firms to tailor their approach to consumers, especially with the new consumer duty to support good customer outcomes?

Furthermore, five million UK adults are currently locked out of accessing credit because they are “thin-file”, as decreed by the credit reference agencies. Fairer Finance found that half of consumers did not know that missing a payment would harm their credit score. While checking affordability is crucial, it is evident that consumers don’t know how a credit score works.

Polling from last year by the Startup Coalition, formerly Coadec, found that two-thirds of UK adults said that credit scores should belong to them. In reality, credit scores are the commercial property of agencies that operate as a law unto themselves. The Steering Committee on Reciprocity, the entity that oversees the flow of data between financial institutions and the agencies, doesn’t even have a consumer representative.

When things go wrong and consumers fall into forbearance, today's regulations make things worse. Using new technology like open banking, best-in-class credit providers can design personalised repayment plans as soon as individuals fall into debt. But the Consumer Credit Act demands that creditors send a template Notice of Sum in Arrears regardless of any plan in place. This leads to confusion and contradiction, when consumers are often at their most vulnerable. Worse still, if they want to complain to the Financial Ombudsman, consumers are let down again. The Ombudsman is unresponsive and takes too long, and, at last look, it has a Trustpilot ranking of 1.3, with highlights from recent reviews including calling it “a waste of time”, “completely ineffective”, and “a comedy without laughs”.

Finally, when consumers needed it most consumer credit legislation failed to keep up with new forms of lending. Buy Now, Pay Later remains unregulated, over two years after the independent Woolard review called for regulation. At the Startup Coalition, we’ve also heard that the firms offering BNPL and other innovative forms of credit are crying out for action too. Uncertainty is bad for business, as well as bad for customers.

The Government is finally starting the process of refreshing the outdated consumer credit regulatory regime in the UK but must be ambitious. At the Startup Coalition, we think it’s about time the Consumer Credit Act made way for a regime grounded in the success of the FCA’s last ten years. We need a new rulebook, action to hold the credit reference agencies accountable, and an ombudsman that works too. Fixing the system requires a wholesale upgrade, and it's long overdue.