A government shakeup of financial regulations could see the Section 75 rules that protect customers when they spend with their credit cards be ‘watered down’.
A Treasury consultation document confirmed plans to revise the Consumer Credit Act 1974. This is the law that regulates £200 billion in debt each year, including credit cards, store cards, personal loans, payday loans payment and installment purchase agreements.
The exact changes are still being negotiated, but they could affect consumers if vital refund protections end up being changed or abandoned.
One key change to watch out for is what happens to credit card refunds, known as Section 75 protections.
Taking full credit: The FCA regulator has overseen consumer credit since 2014
Sarah Coles, head of personal finance at stockbroker Hargreaves Lansdown, said: “The Consumer Credit Act has come to the rescue of millions of people. Therefore, the fact that the government is planning to remove the Act will surely be disturbing.
‘Those who responded to the query were keen to keep something similar to Section 75, but there were calls for some changes. This might strengthen some rights but endangers others’.
The protection of Section 75 means that if a consumer buys something on credit worth between £100 and £30,000, the lender and the seller are equally responsible for fixing the problem if something goes wrong.
Customers can often get their money back using Section 75 in cases where a product was not delivered as promised or was canceled on a holiday, for example.
Treasury said today: “It is clear that respondents support the change and therefore the Government intends to proceed with an ambitious approach to CEC reform.”
This is all we know about how credit card and loan regulation might change in the future.
What is the Consumer Credit Law?
The CCA is a 1974 piece of legislation designed to incorporate a unique approach to regulating consumer lending. It still applies today, with minor adjustments over time.
Before the CCA, this sector was subject to a hodgepodge of different laws, and often no law at all.
The CEC changed all that by introducing rules for how lenders structure deals, advertise, pay off loans, and establish repayment rights for consumers, primarily Section 75 rules.
The Office for Fair Trading oversaw the CCA until 2014, when it was handed over to the Financial Conduct Authority regulator.
What about the CCA is changing?
Two things. Firstly, the Government wants to nullify much of the CCA and let the FCA write its own rules on how it regulates debt.
The government “will repeal much of the CCA and recast it in the FCA rule book,” the Treasury said.
In part, that’s because some rules need to be updated, and in part because the FCA doesn’t have the powers it needs to continue with some of the rules if the CCA ends.
A Treasury document on the changes stated: ‘The CCA provides consumers with important rights and protections that protect consumers in both the pre-contractual and post-contractual stages of an agreement.
‘The consultation explained that the current FCA […] the regulatory powers would not allow the FCA to replicate all of these rights and protections in its regulations.’
House of Cards: Consumers deal with a confusing mass of credit card documents
Second, the revision also means being able to update the CEC’s wording, which is nearly 50 years old.
These laws were introduced before such inventions as ‘buy now pay later’ loans, the Internet and smartphones, for example.
Treasury Economic Secretary Andrew Griffith said: “While well designed for its time, the CEC is under increasing pressure to deliver a 21st century customer experience.
‘Existing legislation is ill-adapted to a technology that was not conceived nearly 50 years ago. It poses challenges in financing emerging technologies such as electric cars and enabling online customer journeys via smartphones.”
What changes could be on the table?
It is clear that much of the CEC will be destroyed. However, exactly what will change is still up for grabs, and consumers won’t see any difference for months or years yet.
But we do know that buy-now-pay-later loans will be regulated as part of the changes.
The FCA could also improve the wording of the fine print of the loan.
For now, the CCA means that lenders must give customers pre-written documents before they can get a credit card or loan, such as “pre-contractual credit agreements.”
But experts like the campaign group Fairer Finance say these documents, while well-intentioned, are clunky, confusing and misunderstood by many consumers.
Fairer Finance wants these documents changed to make them easier for consumers to interpret.
James Daley, CEO of Fairer Finance, said: ‘The thing that frustrates me most about this market is that there are pretty strict rules about what lenders have to tell customers before they complete an application. More than any other financial services market.
“Unfortunately, some of these rules are almost 50 years old and are not suitable for today’s market, which includes many different types of credit products.”
This can be a problem when customers borrow on devices with small screens, such as smartphones.
Treasury noted that “the form prescription for information requirements means that businesses are required to provide information in a way that is not compatible with smartphones and that this leads to less customer engagement with important information.”
What about the Section 75 rules?
The good news for consumers is that there are no plans to scrap the crown jewel of the CEC’s Section 75 reimbursement rules.
Section 75 protections are likely to remain, Treasury said today.
Treasury added: ‘Section 75 was generally viewed as an important provision by industry and consumers, with some noting that it gives consumers greater confidence to make purchases on credit. However, many respondents believed that it could be modernized.’
Some lenders told the Treasury that they wanted to see the Section 75 rules eased.
For example, when customers have a problem with something they buy on credit, some companies wanted lenders to only be responsible for the value of the loan itself, not the full replacement value of a product.
Others wanted to see consumers first approach sellers with refund requests before they could ask the lender.
An FCA spokesperson said: “We are keen to ensure that consumer credit regulation supports a well-functioning and competitive market, while maintaining adequate consumer protections.”
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