Supplementary Written evidence submitted
by the Finance and Leasing Association
FINANCIAL REGULATION INQUIRYRETAIL
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
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
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