Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

Supplementary Written evidence submitted by the Finance and Leasing Association


  Thank you for the opportunity to give oral evidence to the Committee on 11 November. This letter responds to your invitation to write with any further thoughts.

  During the hearing, I mentioned my concern that the UK's retail consumer credit markets were contracting and becoming more polarised. To put this in perspective, before the credit crunch 16 FLA members operated in the direct unsecured loans market. There are now five. In the second charge mortgage market, the figures are 17 and six respectively. Inevitably, this means less choice for consumers and a greater risk of financial exclusion. Any changes to the current regime need to avoid making this situation worse. At the very least, uncertainty and transitional disruption must be minimised.

  As we discussed on the 11th, the main new development since the FLA submitted its original Written evidence is the announcement by the Government of its intention to merge the competition responsibilities of the Office of Fair Trading (OFT) and Competition Commission, and devolve the consumer protection functions of the former to other organisations.

  On the face of it, this would appear to pre-empt the Government's intended consultation on whether responsibility for retail consumer credit regulation should be transferred from the OFT to the new Consumer Protection and Markets Authority (CPMA).

  As I indicated last week, the FLA is not opposed to this in principle. But we would be concerned if it were seen by the Government as a residual issue, to be dealt with after the rest of the new regulatory regime is set in place. Design work on the shape and size of the new regime, including its funding and the necessary transitional arrangements, needs to start now. The existing body of UK consumer credit law is complex and extensive, and the last revision (implemented as recently as 2008) took two years to plan and the same again to implement.

  The Government also needs to recognise (a) that any new regime will be seriously constrained by European legislation, including the maximum-harmonisation Consumer Credit Directive, currently being implemented in the UK; and (b) that credit is fundamentally different from the other kinds of retail financial services which will be regulated by the CPMA. The primary risk in a credit transaction lies with the lender, not the borrower. For deposit-taking operations the main risk lies with the depositor rather than the bank.

  New regulation for consumer credit also needs particular care because existing regulation is designed as an integral part of the UK's overall consumer protection regime. For example, the Consumer Credit Act (CCA) and the Sale of Goods Act interlock through Section 75 of the CCA, which allows a consumer to seek redress from the lender if satisfaction cannot be received from the supplier of goods. As a result, consumer complaints to the Ombudsman often involve elements of both Acts.

  As we discussed on the 11th, in many ways the current system has done a good job. The OFT is, for example, a relatively low-cost organisation compared with the FSA. But any system can be improved. The FLA's shopping list for a new regime would include the following. It should:

    — Do no harm (ie avoid shrinking the market further, raising costs to consumers, or driving mobile capital from the UK);

    — Drop the remaining archaic elements of the current CCA (eg the complex way changes to credit agreements need to be dealt with, which inhibits lenders' forbearance);

    — Avoid product regulation like interest rate caps (which evidence from overseas markets shows would result in higher prices and even thinner markets) and "cooling off" periods (which would gold-plate existing EU regulation and threaten the viability of store cards, which support an important element of high street sales);

    — Be clear and predictable for lenders and borrowers (avoiding the retrospection which is a feature of the current system, particularly those aspects regulated by the FSA);

    — Clarify the role of the Financial Ombudsman as an impartial complaint-handling body;

    — Deal sensibly with existing, as well as future, lending;

    — Be properly resourced; and

    — Prioritise the needs of the 4,000 firms who actually lend, rather than the nearly 100,000 entities currently licensed by the OFT.

  Given these points, we have some concern that the Government's original consultation document A new approach to financial regulation (July 2010) suggested that the CPMA's powers would simply be based on those provided to the current FSA by the Financial Services and Markets Act. Our recent discussions with the FSA over the possible application of their new mortgage proposals to the second-charge market (currently regulated by the OFT) have reinforced this concern.

  For all the reasons set out in this letter, simply applying a standard FSA-style rulebook to consumer credit is unlikely to meet the needs of the market or of consumers.

22 November 2010

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