More than a decade on from the global financial crisis, you’d have thought that the regulatory architecture extending across UK financial services would be relatively settled. We appear, after all, to have learned lessons about the risks of ‘box ticking’, not seeing the wood for the trees, and the superiority of an outcomes-based ‘prudential’ approach. And although Brexit has altered the cast list of decision-makers, the general approach has been fairly constant.
Yet listen closely and you can still detect movement in the tectonic plates. The Government’s forthcoming Financial Services Bill may not have massive or immediate implications for the credit and collections sector, but their plan to give the FCA a new objective for international competitiveness is designed, over time, to offset what they perceive as the ‘gold-plating’ of the existing EU-UK regulatory regime in favour of rules that give British firms a comparative ‘edge’.
The post-pandemic supply chain and consequent cost of living pressures could well drive more customers towards credit and debt – so it is not surprising that Ministers are pressing ahead with part two of their ‘debt respite scheme’ in the form of a new Statutory Debt Repayment Plan (SDRP). The proposal is still out for consultation so could change but – in short – it aims to give individuals experiencing debt problems the chance to combine sums they owe into a single plan, administered by their debt adviser, to be repaid to creditors (big and small) over a longer period of time. The theory is that this will tackle a ‘gap’ in the existing solutions available for customers for whom a voluntary debt management plan or debt relief order may not be either suitable or sustainable.
But if the regulatory approach is truly shifting up a gear towards a fully principles-based approach, then updating some of the older constructs governing consumer credit must be a priority.
Putting to one side that creditors will not be repaid in full and so the term ‘repayment plan’ is a bit of a misnomer (creditors face a 10% admin fee deducted and interest foregone), this proposal is quite an activist piece of regulatory change, extending to small and ad hoc creditors not just the banks, mandating the split between ‘priority’ and ‘non-priority’ creditors and placing significant responsibility on the shoulders of the debt advice community too. So SDRP will change the credit landscape.
But perhaps the most significant change on the horizon is the roll-out of the FCA’s ‘Consumer Duty’ across the financial services sector. At first glance many have queried whether this is merely a refresh of the ‘treating customers fairly’ regime. But the regulator is adamant it represents a ‘paradigm shift’ in their expectations. There isn’t yet a private right of action for breaches of principles, but the FCA now expects all firms to be able to prove that they understand their customers, their objectives and how the relationship affects them – how they communicate, how third parties affect customers, all revolving around the concept of “good outcomes” for clients.
Personally, I think the concept of a ‘fair’ outcome is preferable to ‘good’, not least because a customer being asked to repay a debt, or even being enforced against, is unlikely to view that as ‘good’. The fulfilment of all responsibilities in a fair contract is not an unreasonable expectation. And the choice of words really does matter. For instance, using the term ‘consumer’ can lose sight of the fact that as well as their rights as a consumer, in relation to the repayment of a debt the consumer is a ‘debtor’ and has clear obligations to the creditor too. It may not be as retail-friendly, but in strict policy terms it is important to recognise the reality of the transaction.
But if the regulatory approach is truly shifting up a gear towards a fully principles-based approach, then updating some of the older constructs governing consumer credit must be a priority. The 1974 Consumer Credit Act is nearing its fiftieth birthday, and prescribes in minute detail some of the wording and form of notices customers must be sent, even though these can be highly confusing and can cause more worry for many customers rather than less.
The Act still forces firms to send correspondence in situations where they know the customer is no longer at an address. Post contractual information requirements – such as Notices of Sums in Arrears – often don’t reflect the flexible repayment plans customers have already been given. The current sticking-plaster solution from regulators, called ‘layering’, suggests that a further note should be added to the already large envelope telling the customer not to take the Notices of Sums in Arrears as gospel, which is a ridiculous and confusing state of affairs. It is welcome news that Treasury Ministers have announced their intention to reform the Act and align rule-making within the FCAs remit – a necessary step that should be aligned with the roll-out of the ‘consumer duty’ if that is to work effectively.
The FCA have recognised the need to reform the Act for some time and while it is positive that Ministers now agree, the signs are there will be a long consultation process and perhaps even longer before legislative time is found to make the actual changes. So the detailed case remains to be made – and at the Credit Services Association conference at Radisson Blu, Manchester Airport on 15 September, the need to dispel customer confusion and boost engagement will be central to our campaigning goals. Regulation is changing – but there is still a long way to go.