UK’s approach to consumer credit regulation and alternative dispute resolution arrangements make it an outlier among OECD jurisdictions, says FLA

The Finance & Leasing Association (FLA) – in conjunction with Eversheds Sutherland – has today published at its Annual Insights Conference new independent research that examines the degree to which the UK's approach to consumer credit regulation and alternative dispute resolution arrangements (ADR) make it an outlier when compared with other OECD jurisdictions.

The global law firm was commissioned to analyse the legal and regulatory systems for consumer credit in France, Germany, Italy, Poland, due to their comparable scale to the UK, and New York State (USA) because of its licensing and supervisory regime for unsecured consumer credit.

The comparison of regulatory regimes revealed that the UK is an outlier in a number of areas.  Only the UK has:

• a multi-faceted regime comprised of law and regulation, regulatory rules and guidance, regulatory principles and outcomes-focused regulation.
• a private right of redress for breach of regulatory rules (FSMA s138D).
• provisions for unfair relationships claims specifically relating to consumer credit (Consumer Credit Act (CCA) s140A).

Furthermore, outside of acting without authorisation or breaching usury laws, the UK and Italy are alone in having unenforceability sanctions for specific breaches of consumer credit law and regulation. While the other assessed jurisdictions have a consumer protection objective, outside of the UK the research suggests that very few regulators required consumer remediation or redress on the same scale as the FCA.

The comparison of ADR arrangements showed that:

• The UK is an outlier because ombudsmen in all other assessed jurisdictions are required to apply the law in their decisions.
• In the UK, the Financial Ombudsman Service (FOS) decides complaints on what it considers to be fair and reasonable in all circumstances of the case. This includes law and regulation and good industry practice at the time of the customer complaint.  However, the FOS can depart from these, meaning that complaints may be upheld even where firms have complied with law and regulation. There is criticism that this can lead to subjective and inconsistent decisions.
• The UK is alone in requiring firms to apply previous FOS decisions –the mechanism which turns the FOS into a quasi-regulator. None of the other assessed jurisdictions require firms to apply ADR decisions to other similar complaints. Evershed's analysis states; “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.”
• Inconsistency in FOS decisions can be a factor driving complaints and claims management activities – including the mass use of templated and unsubstantiated claims.  
• This material monetisation of the complaints process by claims firms is not seen in the other assessed jurisdictions. The analysis states “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.”

Commenting on the findings, Stephen Haddrill, Director General of the FLA said:

“Until this point, we have not had authoritative and independent research to enable us to clearly compare the UK's regulatory and ADR arrangements to those in similar markets.

“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.  

“There is a reason why the UK is the only country in the study targeted by claims management companies and claimant law firms. Inconsistent decision-making by FOS, along with its quasi-regulatory approach, have monetised the complaints process.

“Reform of both the CCA and the FOS are underway, but fundamental change is required if we are to reinstate certainty and clarity for firms, and prompt complaint resolution for customers.”

Chris Busby, UK Head of the Financial Services, Disputes and Investigations Group at Eversheds Sutherland, and one of the authors of the report comments:

“We are thrilled to have led on this important piece of work which comes at a critical juncture, underscoring the importance of our findings.

“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 ongoing reviews into consumer credit, including buy-now-pay-later schemes, and the Financial Ombudsman Service continue to take shape, we hope this study will serve as a useful resource.”