UK consumer credit regulation stands out

At the recent Annual Insights Conference, the Finance & Leasing Association (FLA), in collaboration with Eversheds Sutherland, released independent research highlighting how the UK’s consumer credit regulation and alternative dispute resolution (ADR) systems set it apart from other OECD jurisdictions. This research focused on countries such as France, Germany, Italy, and Poland, which have similar market scales, as well as New York State, USA, for its consumer credit licensing and supervision.

The findings indicate that the UK operates under a uniquely complex regulatory landscape. It is the only country with a multi-layered framework that integrates various laws, regulatory rules, and outcomes-focused regulation. Additionally, the UK grants consumers a private right of redress under the Financial Services and Markets Act (FSMA) for breaches of regulatory rules, which is not a feature found in most other territories. Furthermore, the Consumer Credit Act allows for unfair relationship claims tailored specifically to consumer credit situations.

Notably, both the UK and Italy impose unenforceability sanctions for certain violations of consumer credit laws. While other jurisdictions may have robust consumer protection objectives, they typically do not reflect the same stringent requirements for consumer remediation or redress as demonstrated by the UK's Financial Conduct Authority (FCA).

The research also shed light on the UK's unique ADR arrangements. Unlike the ombudsmen in the assessed jurisdictions which are required to rule based on the law, the UK's Financial Ombudsman Service (FOS) makes decisions based on its judgment of what is fair and reasonable in each case. This self-defined approach means that the FOS can overlook strict legal compliance if deemed appropriate, raising concerns over the potential for subjective decision-making. Furthermore, firms in the UK are obliged to follow previous FOS decisions, which can turn the FOS into a quasi-regulator—an obligation not similarly found in the other jurisdictions examined. Eversheds Sutherland noted that “a reason for this could be that, in most of the other jurisdictions where ombudsmen are required to apply the law, the ombudsmen have less discretion... the position may be more certain, clearer, and more consistent for both complainants and respondent firms.”

The inconsistency in FOS decisions can exacerbate the volume of complaints, facilitating claims management activities driven by templated and unsubstantiated claims. Such monetisation of the complaints process is notably less prevalent in the jurisdictions studied. Eversheds Sutherland remarked that “it could be that clearer rules and non-binding decisions in other assessed jurisdictions, make it less feasible for claims management firms... to monetise the financial services complaints industry.”

FLA Director General Stephen Haddrill commented on the findings, highlighting the lack of independent research until now that could facilitate credible comparisons of the UK’s regulatory framework against its peers. He stated, “The findings show a UK system of overlapping and contradictory requirements that complicate compliance and hinder innovation, all totally at odds with the growth agenda.” Haddrill further noted that “there is a reason why the UK is the only country in the study targeted by claims management companies and claimant law firms,” attributing this to the FOS's inconsistent decision-making and its quasi-regulatory stance.

Chris Busby, UK Head of the Financial Services, Disputes and Investigations Group at Eversheds Sutherland, expressed his satisfaction with leading this critical analysis. He reflected, “This research highlights the UK’s unique position in several respects and suggests that the regulatory framework in the UK regarding consumer credit is more restrictive compared to other jurisdictions.” As conversations about reforming the Consumer Credit Act and the FOS continue to evolve, both organisations hope the findings will prove useful in shaping future regulatory changes.