510	The government’s policy towards consumer credit

though it is welcome that the FSA is also of this opinion: ‘we are under no illusions about quick fixes. This is inevitably a long-term process.’107

The FSA is also charged with the role of ‘securing the appropriate degree of protection for consumers’.108 When considering the degree of protection that is appropriate, the FSA must have regard to four considerations:

(1)the differing degrees of risk involved in different kinds of investment or other transaction;109

(2)the varying levels of experience and expertise those different consumers may have in relation to different kinds of regulated activity;110

(3)the needs that consumers may have for advice and accurate information;111

(4)that consumers should take responsibility for their decisions.112

The creation of the objective of consumer protection is again a welcome step in such a complex and evolving financial system. For many consumers, the inclusion of this objective has come too late for those facing the consequences of investments made as a result of poor and misleading advice. The general ethos of this objective is that although consumers need to be protected and adequate mechanisms for protection need to be established, the FSA has to strike the balance between the expectations for protection that consumers have and the level of responsibility that they must accept for their own actions. This objective is not to protect consumers from every possible risk that they face.

The FSA published a paper in 2006 which explained how these two objectives are going to be achieved for consumers through its Treating Customers Fairly initiative.113 It should be noted that this campaign only applies to the regulated sector and personal loans fall outside the scope of the Financial Services and Markets Act (FSMA) 2000. However, the Financial Ombudsman Service has indicated that they are prepared to investigate claims made by customers who have been lent money that they feel they are unable to repay. Instances of irresponsible lending are regulated by the unfair relationship test created by the

CCA 2006. This measure is a substitute for the ineffective extortionate credit bargain regime under the CCA 1974, which will be discussed below.114

Q4 What is irresponsible borrowing?

7â Ineffective legislative protection for consumers

Reform of the CCA 1974 was an important part of the government’s policy aimed at increasing people’s access to affordable credit.115 NACAB expressed

107FSA Press Release, ‘Clued up consumers are FSA goal’, FSA/PN/012/2001, 25 January 2001, available at www.fsa.gov.uk/Pages/Library/Communication/PR/2001/012.shtml.

108	FSMA 2000, s.5(1).â 109â Ibid. s.5(2)(a).â 110â Ibid. s.5(2)(b).
111	Ibid. s.5(2)(c).â 112â Ibid. s.5(2)(d).

113FSA, Treating Customers Fairly: Towards Fair Outcomes for Consumers (London, 2006).

114For a more detailed discussion of the unfairness test see Part 7 Chapter 2.

115HM Treasury, above n. 20.

511	7â Ineffective legislative protection for consumers

the view that ‘the dynamic changes in the consumer credit sector have not been matched by changes in the legislation intended to protect consumers from abuse’.116 There was a consensus of opinion amongst commentators that the CCA 1974 was in desperate need of reform. The DTI stated that ‘the laws governing this market were set out a generation ago … the regulatory structure that was put in place … is not the same as the regulatory structure required today’.117 The Griffiths Commission also pointed out that ‘since the introduction of the Act, the credit market has been wholly transformed and the current credit market bears little resemblance to that which existed in 1974’.118 Brown noted that:

within a few years of the final implementation orders of the Consumer Credit Act being issued, which incidentally was not until the mid-1980s, general dissatisfaction with the working of the Consumer Credit Act was beginning to surface. Although no reform took place at that time, further suggestion for change was again mooted a few years later, resulting in the Consumer Credit Review set up by the Government in 2001.119

Melanie Johnson MP, the then Consumer Minister, stated that ‘our credit laws are 30 years old and need a radical overhaul to protect people in today’s credit market’.120

The CCA 1974 was outdated and had not kept pace with the complexity and diversity of the consumer credit market. The Act contained a number of inadequacies: the extortionate credit provisions;121 the consumer credit licensing regime; and the limited enforcement powers of the OFT.122 Indeed, the DTI took the view that:

The Act has not provided sufficient protection for consumers where they have been unfairly treated by consumer credit businesses. The rights that the Act accords to consumers and the avenues it provides to them to challenge unfair conduct are restricted. Furthermore, the Act has provided regulators with insufficient powers to tackle improper or unfair conduct by consumer credit businesses.123

116NACAB, above n. 5, at 1.

117The DTI stated ‘in 1971, there was only one credit card available; now there are 1,300. 30 years ago, £32 million was owed on credit cards, now it is over £49 billion’. DTI White Paper, above n. 19 at 12.

118 Griffiths Commission, above n. 8, at App. 2.3.â 119â Brown, above n. 11, at 318.

120DTI, Press Notice P/2001/398, ‘Johnson announces biggest overhaul of credit laws for a generation’, 25 July 2001.

121For an excellent commentary on relevant judicial precedent see L. Bently and G. Howells, ‘Judicial treatment of extortionate credit bargains, Part I’ (1989) Conveyancer and Property Lawyer 164 and ‘Loan sharks and Extortionate Credit Bargain, Part II’, (1989) Conveyancer and Property Lawyer 234.

122Kempson and Whyley, above n. 23, at 36–37. For a more detailed commentary on consumer credit licences see OFT, Consumer Credit Licensing: General Guidance for Licences and Applicants on Fitness and Requirements (London, 2008).

123DTI, Consumer Credit Bill: Full Regulatory Impact Assessment (London, 2004) 4. Further support for this view is offered by Lomnicka, above n. 18, at 132.

512	The government’s policy towards consumer credit

The reform process began with the publication of a White Paper in 1999, in which, the government announced its intention to modernise the CCA 1974 and to ensure that it provided adequate protection for consumers.124 In October 2000, a Task Force was created with the remit of achieving responsible lending and borrowing.125 Later that year, the DTI published a consultation paper which sought the opinions of interested parties on the general effectiveness of the CCA 1974.126 A second White Paper was published in December 2003, with the aim of creating ‘a more transparent regime so consumers can make better informed decisions and get a fairer deal’.127 In conjunction with the White Paper, the DTI published another consultation paper on how the legislative changes were to be implemented.128 Subsequently, several Statutory Instruments were introduced to implement some of the proposed amendments to the 1974 Act.129

However, a majority of the reforms were introduced by the CCA 2006, which came into effect on 1 October 2008. The scope of this Act is extensive and applies to the regulation of consumer credit agreements and consumer hire agreements; the provision of information to debtors and hirers after the agreement is made; unfair relationships between debtors and creditors; the licensing of consumer credit and hire businesses and ancillary credit businesses; the powers of the OFT in relation to the licensing of consumer credit and hire businesses and ancillary credit businesses; appeals from decisions of the OFT in relation to the licensing of consumer credit and hire businesses and ancillary credit businesses; and the extension of the jurisdiction of the Financial Ombudsman Service.130

However, successive governments are still not satisfied with the measures introduced by the CCA 2006 and believe that that there is still the need for further legislative intervention. In May 2008, the government initiated a Review of Consumer Law,131 the aim of which was to achieve a balance between protecting consumers, reducing the unwarranted burdens imposed on businesses, and seeking to promote and endorse fair and competitive markets. The Review sought views on four particular areas: the case for reform; options for reform; consumer empowerment and redress; and securing compliance with the law. As a result of this Review, the DBIS took the view that:

the law is complex, fragmented and inflexible. This can lead to higher levels of consumer detriment as well as unnecessary costs for business and less effectiveness for enforcers. The Government is committed to a fundamental

124DTI White Paper, Modern Markets: Confident Consumers (London, 1999).

125DTI, Report by the Task Force on Tackling Overindebtedness (London, 2001).

126DTI, Tackling Loan Sharks– and more!– Consultation Document on Modernising the Consumer Credit Act 1974 (London, 2001).

127DTI White Paper, above n. 19, at 5.

128DTI, Establishing a Transparent Market (London, 2003).

129For a more detailed discussion of these measures see Part 7 Chapter 2.

130For a more detailed commentary on these issues see Part 7 Chapter 2.

131DBIS, Consumer Law Review: Call for Evidence (London, 2008).

513	7â Ineffective legislative protection for consumers

modernisation of the consumer law framework to fit the modern, interconnected and interdependent world. This will ensure consumer rights are fit for purpose in the age of the Internet. It will provide consumers, business and enforcers with the clarity and confidence to explain, to exercise and to enforce the protections and responsibilities we all have as consumers.132

In July 2009, the government published another White Paper,133 the aim of which was to review the regulations that govern consumer credit and store cards. In 2004, HM Treasury Select Committee had warned that ‘store cards charge much higher rates of interest even than credit cards. Although in part this may flow from a pricing model which places all the costs of the operation on the minority who pay interest, there is also evidence to suggest that competition is not working properly’.134 The 2009 White Paper concentrated on four areas relating to credit and store cards:

firstly, the requirement that repayments to a credit or store card are allocated to debts attracting the highest interest rates first; secondly, the level of minimum payments; thirdly, the issue of unsolicited credit limits; and finally, the ability of lenders to raise interest rates on existing debts.135

It could be argued that a review of the regulations that apply to credit and store cards is rather timely given the adverse impact of the credit crunch and record levels of consumer debt. Indeed, the DBIS took the view that:

Consumers value the flexibility that credit and store cards offer and their use has risen dramatically in the past two decades. However, a significant minority of consumers carry high levels of debt on their credit and store cards with no prospect of paying it off within a reasonable amount of time, if at all. Store cards account for a much smaller proportion of unsecured borrowing than credit cards, but are of particular concern because of the high interest rates they charge. Many consumers are facing financial pressures as a result of the downturn and are now having to deal with unsustainable debts built up on their credit and store cards during the years of easy credit.136

The proposals in the 2009 white paper have been largely welcomed by consumer groups. For example, Which? expressed the view that ‘for too long, card companies have been allowed to apply the tricks of their trade to the detriment of millions of consumers’, adding that ‘we think it’s simply wrong to entice people into spending more than they can afford and then to squeeze as much money out of them as possible’.137 Similarly, Malcolm Hurlston of the Consumer Credit Counselling Service stated that ‘the government has put its finger on the four main problems that consumers have with credit card debt.

132DBIS, A Better Deal for Consumers: Delivering Real Help Now and Change for the Future

(London, 2009) 77.

133	Ibid.â 134â HM Treasury Select Committee, above n. 78, at 46.
135	DBIS, above n. 39, at 3.â 136â Ibid.

137BBC News, ‘Credit card terms “to be curbed”â’, 27 October 2009, available at http://news.bbc. co.uk/1/hi/business/8326485.stm.