Regulation and Business Customers
With the new Consumer Duty coming into force it was something of a surprise to many (including us) that the FCA’s revised rules appeared to in effect extend beyond the usual definition of a “retail customer” as “an individual who is acting for purposes which are outside his trade, business or profession,” so that for the Consumer Duty regulation by the FCA will also now extend to any customer in a regulated activity, in other words encompassing sole traders and partnerships of 2 or 3 who are business customers in a CCA regulated agreement.
Some went as far as to suggest that this was an extension of the FCA’s jurisdiction by stealth, since it was never signposted or the subject of any debate and was simply presented as a fait accompli.
The extent to which there should be any regulation of transactions with business customers has been a matter of hot debate in the asset finance industry going back decades. We remember that when the CCA first came into full effect in 1985 there was much discussion about future reforms excluding business customers altogether.
In this regard it is particularly interesting to consider the direction of travel of future reforms to the CCA regime.
On 11 July 2023 HM Treasury published its response to the Consultation on reforming the CCA and we noted with particular interest its reporting of the responses received to the question of the scope of regulation as it applies to business customers:
“3.5 Many stakeholders argued that the existing scope set out in the CCA relating to regulation of small and medium enterprise (SME) business lending should be altered (question 5). Industry stakeholders generally supported reducing the scope or creating a separate set of requirements and protections for small business lending in the FCA Handbook. They argued that the imposition of CCA requirements reduced the availability or increased the cost of loans within scope. They also said that some of the associated protections are not necessary or cause confusion in a business lending context, particularly where a business also has loans for greater than £25,000 that are not subject to the same protections. Some suggested that certain CCA protections (such as sections 56 and 75 and some sanctions) might not be suitable for business lending if it limits lending and could potentially restrict product innovation or market participation.
3.6 Others, including many consumer groups, argued that it is appropriate to extend regulation to all finance directed at sole traders and small partnerships, or that the £25,000 limit should be increased to reflect the effect of inflation since this limit was introduced in 2006. It was noted that there has been a significant increase in the number of self-employed people in recent years and many of them benefit from strong consumer protections. It was also noted that, for sole traders, there is often a blurring between borrowing for business and personal purposes.
3.7 A small number of respondents suggested extending the CCA to cover more business types, beyond just sole traders and small partnerships”.
The HM Treasury document does nothing to pin its colours to the mast on this issue, but merely stated it intends to be “guided by the principles set out on pages 11 and 12”.
A careful review of these principles reveals that the only reference to customers on them use a rather interesting definition – “consumer” (emphasis added):
“Forward-looking – the reform will be mindful that changes made to the consumer credit and consumer hire regulatory landscape should be adaptable to future ways of delivering credit and consumer hire to consumers and to the needs of consumers and businesses.
Simplified – the creation of a regulatory regime that simplifies and modernises ambiguous technical terms used in the CCA to make it clear to consumers what protections they have and to make it easier for firms to communicate these protections and comply with requirements placed on them”.
HM Treasury suggests that it has ambitious plans to reconstruct the whole architecture of the CCA regime, which on any view will take a number of years and probably a number of governments of different hues, so it will be interesting to check back in future years as to the extent to which the scope of regulation will indeed extend beyond those who are “consumers”.