Written evidence submitted by the Finance
& Leasing Association
INTRODUCTION
1. As part of its consultation on a new
regulatory architecture for financial services, the new Government
has asked whether the regulation of consumer credit should be
transferred from the Office of Fair Trading (OFT) to the new Consumer
Protection and Markets Authority (CPMA).
2. This paper sets out the Finance and Leasing
Association's (FLA) views on this aspect of the Government's proposals
and also deals briefly with the question of the prudential regulation
of non-banks.
3. The FLA represents a wide range of lending
companies, including banks, building societies and non-banks of
several kinds. Between them they provide 30% of UK consumer credit
(around £52 billion last year), including credit and store
cards, high-street credit, secured and unsecured loans and direct
lending of many kinds. Our members also fund over half of all
new car sales in the UK (£16.5 billion) via hire purchase.
We are therefore in a unique position in being able to comment
on the impact of regulatory reform from across the credit market.
4. The Government has made clear its intention
to consider the evidence carefully before coming to a view on
the future of consumer credit regulation. The FLA welcomes this
cautious approach.
THE CURRENT
REGIME
5. The Government first needs to identify
any obvious gaps in the existing consumer protection regime. For
36 years the UK has had comprehensive protection for consumer
credit customers in the form of the Consumer Credit Act 1974,
administered by the OFT. Moreover, in the past five years the
pace of change in UK consumer credit regulation has been rapid.
The Consumer Credit Act (CCA) 2006 introduced a new OFT licensing
regime, new and clearer consumer information, and new guidance
for customers in financial difficulties. The OFT maintains a Consumer
Credit Register of licensed companies, inclusion in which requires
market participants to comply with a series of strict fitness
tests.
6. The new EU Consumer Credit Directive
(CCD) (now being implemented) will require standardised information
to be given to consumers when they apply for credit, give consumers
the right to withdraw from a credit agreement within the first
14 days, and create a new right to repay loans early, either in
part or in full.
7. In addition, the OFT has just introduced
a new rulebook on irresponsible lending. Further regulatory change
is also currently under consideration in Brussels.
THE STATE
OF THE
MARKET
8. While well-intentioned, the sheer volume
of this new regulation has contributed to the shrinkage of the
UK consumer credit market, which is increasingly expensive and
difficult for lenders. Owners of mobile capital are already exploring
more attractive overseas markets. Gross unsecured lending in the
UK was down by 11% in 2009. And in the first half of first half
of 2010, FLA consumer finance members wrote 12% less business
than for the same period last year, itself down on the previous
year. There is now a serious risk of creating a market in which
lower or even medium-income customers are prevented from accessing
affordable credit. The social consequences need to be considered
very carefully before further regulatory change is contemplated.
THE CASE
FOR CHANGE
9. We therefore agree with the Government's
view that any change must deliver "real and justifiable benefits"
for consumers. Rigorous cost-benefit analysis will be crucial,
and it is important to be realistic.
10. The creation of a new statutory regime
for consumer credit would be a mammoth task, involving the repeal
and replacement of a body of primary and secondary legislation
which has evolved and been updated over many decades, and is closely
inter-linked and cross-referenced with other legislation (eg on
the sale of goods). Any new regime would also, of course, require
significant system changes and staff re-training in the 100,000
or so companies currently regulated by the OFT for the provision
of credit. While these considerable costs might be outweighed
by potential benefits, they would need to be substantial for both
consumers and lenders.
11. Some FLA members (including the larger
banks) are currently subject to the OFT's regime for consumer
credit and to the FSA's for other forms of financial service provision.
Similarly, companies providing credit services and insurance are
answerable to the two regulators. There would in principle be
efficiency savings to be gained for these companies from unifying
the regimes. A single regulator would arguably be able to take
a broad overview of a firm's business and avoid the "silo-effect"
which can arise when there are several regulators dealing with
different parts of a business. But the differences between the
FSA and OFT have begun to diminish in recent years. While the
FSA in theory takes a principles-based approach to regulation
and the OFT is bound by the highly-prescriptive Consumer Credit
Act, in practice both regimes rely on extensive rulebooks and
supervisory practice has been converging. The primary remaining
difference is that, relatively speaking, the OFT regime remains
low-cost.
12. One concern about the current FSA regime
is that the theory of principles-based regulation allows the regulator
scope for retrospective changes to the rules which can make compliance
planning very difficult. Any new regime would need to ensure clarity
and predictability. A new regime would also require supervisory
staff teams with a very good knowledge of the regulated markets.
The current FSA does not have this expertise in the consumer credit
markets and there would therefore need to be considerable training
and recruitment in setting up a new regime.
13. It is also important to understand that
the Government has relatively little scope to make substantial
changes to actual rules governing the sale of consumer credit
in the UK, because these are largely determined by EU Directives,
including the maximum-harmonisation CCD (see above).
14. It would therefore be important that
any new unified regime was likely (a) to provide further benefits
for consumers and (b) do so in a cost effective way. Neither point
is currently clear and the case still needs to be made for the
proposed move of consumer credit regulation to the CPMA.
PRUDENTIAL REGULATION
AND NON-BANKS
15. Turning briefly to prudential regulation,
it is important to recognise when comparing credit and saving/current
account provision that the risks facing the customer and provider
are fundamentally different. In the credit markets, the main risk
lies with the provider (ie that the customer may not be able to
repay the loan). The opposite is true of other financial services,
where the customer runs the risk that the provider may become
insolvent. This is why a regime of prudential regulation and deposit
protection exists in the saving and banking markets.
16. We continue to believe that this fundamental
distinction remains valid. The new prudential regime should not
attempt to apply a regime designed to protect the customers of
deposit-taking institutions to the consumer credit markets. This
would be likely to produce serious distortions, drive companies
from the market, and give no benefit to customers.
17. We would be happy to provide the committee
with further detail on the issues raised in this paper, as well
as oral evidence.
September 2010
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