The United Kingdom government has announced plans to reform the Consumer Credit Act, which regulates credit card purchases and personal loans. The proposed overhaul aims at cutting costs for businesses and simplifying rules for consumers.
“The Consumer Credit Act has been in place for almost 50 years — and it needs to be reformed to keep pace with the modern world,” said Economic Secretary to the Treasury John Glen in a statement.
The announcement comes in the same week that the U.K. government announced a series of proposals to underpin its digital strategy and the Bank of England raised interest rates to tame the high inflation that could further fuel the national cost of living crisis.
Read more: UK’s Digital Strategy Is to Be the Anti-EU Regulator
While reforming the Consumer Credit Act is an important commitment for the government, it will take some time to complete the renovation, not only because of how the legislative procedure works, but because the law has been in place since 1974 and is highly prescriptive. The first step the government will take is to launch a public consultation by the end of the year. Then, the government may propose legislation, but it will be difficult to pass it during this parliamentary session. Glen said he is “committed to undertake this ambitious long-term reform.”
The government didn’t provide information about the specific measures that it may introduce but it said that it is expected to cut red tape, and most importantly, it will grant powers to the Financial Conduct Authority (FCA) to respond quickly to emerging developments in the consumer credit market, rather than having to amend existing legislation every time. The government also wants to simplify ambiguous technical terms to make clear to consumers what protections they have.
One of the sectors that may be affected by the consumer credit overhaul is buy now, pay later (BNPL). The Treasury closed a public consultation in January about the potential regulation of BNPL, and the results of the consultation may be published soon. Once this review is completed, the FCA can launch its own consultation to propose regulation in the BNPL sector, and according to previous statements, the FCA expects to do so this year. Additionally, in February, under the Consumer Rights Act, the regulator ordered BNPL providers to redraft their terms of services which the FCA deemed a risk to consumers.
Swedish BNPL payment company Klarna welcomed the news about the consumer credit legislation reform. The company has already introduced certain measures to increase transparency and disclosure in the U.K. market.
See more: Klarna Seeks to Appease UK Regulators With Credit Reporting
“By reforming the act, the Treasury has the opportunity make the regulation of consumer credit more focused on enabling competition and better consumer outcomes, not protecting banks,” said Head of Klarna U.K. Alex Marsh, per the Financial Times (FT).
The FCA has also written letters to more than 3,500 lenders across the U.K., including commercial banks and BNPL providers, to remind them of the standards they should meet and to help consumers in vulnerable circumstances, according to a press release. While concerns were found broadly across the sector, the FCA found more serious failings at 30 firms, largely in the consumer credit sector, and said it expects these firms to improve how customers are treated.
Europe Also Amends Consumer Credit Law
The European Union is also in the process of reviewing consumer credit legislation. Last week, the EU Council agreed on the revision of the Consumer Credit Directive (CDD), paving the way for the interinstitutional negotiations that may start by the end of June.
Read more: EU Council’s Amendments to Consumer Credit Bill Favor BNPL Providers
Ministers responsible for trade, economy, industry and innovation across Europe agreed to include several amendments to the original proposal submitted by the European Commission that may reduce transparency requirements for BNPL providers.
After adopting this position on the legal text with the proposed changes, the council can start negotiations with the EU Parliament to reach a common agreement and pass the legislation, which may receive final approval in the plenary session to be held in July.
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