Policy

Response

Consumer Law Review: Call for Evidence

Contact: Chris Lawrenson Date: 4 Aug 2008

Print page  |   Email

Department of Business Enterprise and Regulatory Reform

Response by the Building Societies Association

Introduction

1.    The Building Societies Association (BSA) represents all 59 building societies in the United Kingdom. Building societies have total assets of over £360 billion and, together with their subsidiaries, hold residential mortgages of £250 billion, more than 20% of the total outstanding in the UK. Societies hold about £230 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 38% of all cash ISA balances. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.

2.    This Paper provides a response to the Consumer Law Review: Call for Evidence (the Consultation) published by the Department of Business Enterprise and Regulatory Reform (BERR). The first paragraph of the forward to the Consultation states –


The Association agrees with this comment.  Successive Governments have apparently been committed to deregulation for well over 20 years*, but the laws and regulations have kept piling up throughout this period – words and effective action simply do not correspond.  The range of fair play mechanisms in relation to deposit-taking and mortgages in the UK is badly in need of simplification and streamlining – the complexity and inflexibility, and the unhelpfully overlapping nature of the current mechanisms, have created a regime that is – in some respects - detrimental to both businesses and consumers. 

3.    The BSA's response examines the nature of the problem, considers the obstacles to simplification, and puts forward a plan to help alleviate the problems. Some of the suggestions are in line with the Better Regulation Commission's existing Principles of Good Regulation
Link to Principles of Good Regulation

which we firmly believe should be honoured in all but the most exceptional circumstances. Others are on much the same lines, or in the same spirit, as recommendations in the Hampton Report Link to Hampton Report

Executive Summary

4.    The main recommendations in this response are summarised as follows -

(i)    Alignment with the EU Consumer law agenda

• concerted UK action should be taken to ensure that EU legislation is sensible, proportionate and as simple as possible
• prospective UK legislation should usually be held-over if EU law, covering substantially the same ground, is expected to be introduced
• the UK should not gold-plate EU law, unless there is a clear, demonstrable reason for doing so
• domestic laws covering substantially the same ground as an EU regulation or directive should be repealed when the EU law becomes UK law
• the UK should support harmonisation of EU laws long-term.

(ii)    Drawing the line on excessive, complicated law-making

• no new consumer legislation should be introduced, unless clearly required by the EU – the onus must be on the authorities to enforce the multiplicity of mechanisms currently available
• UK consumer laws should be simplified and harmonised, as and when practicable to do so.
• wherever practicable, regulators should follow a principles-based regulatory approach.

(iii)    Regulatory simplification

• law-makers, regulators and others should take a joined-up approach when developing fairness arrangements for which they are responsible
• the Government should investigate whether or not the OFT's consumer credit functions should be passed to the FSA.

(iv)    Consumers' rights and responsibilities

• the rights of consumers have been widely addressed, but consumers are also entitled to know their responsibilities – it is now time for this matter to be addressed properly.

(v)    The Financial Ombudsman Service

• the wider implications process is to be supported, but made more transparent; however, in the longer run, the absence of any appeal or review arrangements from ombudsmen decisions and the fact that the ombudsman is not bound by the law, will need to be addressed.

The Problem

5.    There is little need to go into detail on the nature of the problem. It is well described in the Consultation. The complexity into which the UK consumer protection system has drifted leads to –

• Sub-optimal outcomes for consumers – how can consumers know their rights when those rights are embodied in an excessively complicated series of, often overlapping, laws, regulation and codes?
  

• Unnecessary burdens for business – the Business Minister, drawing on the Government's recent Administrative Burdens Measurement Exercise, stated that the complexity of consumer law "makes it hard to understand and costs business an estimated £1.25 billion every year". These costs will ultimately be passed on to consumers. Businesses are highly taxed and, especially in a recession, it is hardly surprising that they should be unhappy to have to subsidise a complex and inflexible system that, to a degree, has questionable benefits for consumers. It should be borne in mind that the direct, assessable costs are only part of the picture when it comes to compliance.
  

• Overly restrictive requirements which stifle innovation – this is an increasing problem, but the FSA and the OFT have recognised the importance of principles-based regulation and we welcome this recognition.

6.    The BSA's view is broadly consistent with BERR's own analysis (in paragraph 1.5 of the Consultation) of the problems; ie –

• complexity and cost of existing prescriptive legislation
• fragmentation of legislation
• a lack of flexibility and future-proofing.

This response focuses on the core areas of building society activity ie savings and lending. We do not specifically cover topics dealt with in the Consultation that are outside our field of expertise eg supply of goods, product safety, weights and measures etc.

7.    The table in Appendix 1 to this Paper, first prepared by the Association in relation to a separate consultation last year, illustrates the complex and overlapping nature of the fair play mechanisms relation to UK deposit-taking and mortgage lending. It does not include the wide range of additional laws, which also have a fairness element, such as data protection, anti-discrimination legislation etc.

8.    It is only a matter of time before different fairness rules conflict. For example, lenders sometimes face 'mis-selling' accusations, which – had they refused to lend – could well have opened them up to accusations of financial exclusion or unfair discrimination. So far, such potential conflicts do not appear have materialised into serious practical dilemmas but, unless a simplified, 'joined-up' approach to consumer protection is developed, real difficulties are likely to emerge in time – for instance, the proposed changes to age discrimination laws could potentially outlaw financial services products that – perfectly legitimately – offer benefits to older people.

The Obstacles

9.    In an ideal World, the solution would be to go back to a blank sheet of paper and develop the set of coherent, comprehensive arrangements containing an appropriate measure of 'future proofing' – this is what the UK should, after so many years of regulation, already have. Appendix 2 indicates what this might look like. Unfortunately, such a radical approach may not be a realistic proposition. Having said that, the framework in Appendix 2 could, if the detail were worked out carefully, be consistent with EC law – see below. There are certain significant obstacles to simplification as follows –

• EU law

10.    The main barrier to the adoption of a simplified approach in the UK is the fact that, broadly speaking, domestic legislation has to follow EU law, such as EU directives (although we acknowledge the variety and types of obligations imposed by different directives); therefore, the UK's opportunities for independent action are severely constrained. The UK might develop a strategy for simplification, but this would have to operate subject to the restrictions imposed on it by EU law. However, the EU's exercise in simplifying the Consumer Acquis might ultimately be helpful (see below).

• Systems and procedures

11.    Another obstacle is the fact that, once new rules become a requirement, systems, procedures and bureaucracy build up around them that are subsequently difficult, and costly, to unravel. This barrier should not be underestimated. For example, in late 2007, the BSA consulted its members on deregulation - Fair Play Arrangements: Towards a Simpler Approach. Although numerous consultees regarded mortgage regulation (MCOB) as overly-prescriptive and unhelpful to lenders and borrowers alike, many expressed concerns about the costs and upheaval of altering arrangements that lenders and borrowers were now used to – indeed, a majority view was that the arrangements (because of those obstacles) should not be changed.

12.    Equally, new laws and regulations usually mean that either new regulators, or new sections within Government or regulatory authorities, have to be established to monitor and enforce the arrangements. Again, there are inevitably problems and costs in removing, or changing, such arrangements once they are embedded.

• Lack of consensus about the problem and the solution

13.    It is by no means clear that there is any consensus, across industry, Government, regulators, consumer bodies etc about the existence of a problem, its nature or how it might be alleviated. We think, for example, that some consumer organisations might suspect that proposals for simplification were, in truth, attempts to strip-away consumer rights. That is one of the reasons why the BSA welcomes the Consultation – it would be useful to examine whether or not there is some common ground on the matter. For instance, we certainly find it hard to believe that consumer bodies support the overly-complicated, inflexible, and sometimes overlapping consumer protection measures now in place, and would be interested to see their views on this matter in the context of the Consultation.

The Solution

14.    The BSA suggests the following 12-point plan to address the problem of the complex and inflexible consumer protection regime – naturally, it focuses on deposit-taking and lending, but most of the proposals are equally applicable to other areas. If it could be accompanied by greater clarity on consumers' responsibilities, this would be useful both for consumers and businesses – the BSA is in contact with the FSA and the OFT on this subject and a programme of work is planned.


15.     EU Regulations are binding and directly applicable. EU Directives require member states to change their national laws within a stated period of time in order to give effect to the directive. Directives can be implemented in the UK either by statute or by delegated legisiation under the European Communities Act 1972.  Recommendations and Opinions have no binding force, but merely state the view of the EU institution (such as the Commission) issuing them.

16.    The UK, like other EU members, has a degree of influence over EU law. It is important that the Government and other interested parties continue to work together to help ensure that EU directives are as sensible, proportionate and as simple as possible. The recent exercise, organised by the DTI/BERR in relation to the Unfair Commercial Practices Directive demonstrated that the UK can have a fair degree of influence provided relevant UK agencies adopt a strong, concerted approach. Therefore, our first recommendation is –

1(a) That concerted UK action be taken to ensure that EU legislation is sensible, proportionate and as simple as possible.

17.    It is also important that the UK, so far as practicable when introducing law, keeps in step with the EU. There is, for example, little point introducing new domestic legislation on a subject area when EU legislation is on the horizon because this is likely to mean that further changes would have to be made, adding to business costs, consumer uncertainty etc
 
18.    Equally, once a directive becomes EU law, the UK should not introduce super-equivalent provisions unless absolutely necessary to reflect demonstrably different UK conditions; ie every reasonable step should be taken to ensure that the UK does not 'gold-plate' EU law. Indeed, it is already part of one of the 5 principles of good regulation, published by the Better Regulation Commission of the Cabinet Office, that "EC Directives should be transposed without gold plating" and we firmly believe that this should be honoured except in very rare cases indeed.

19.    In its September 2006 Report, Administrative Burdens – Routes to Reduction, the Better Regulation Executive of the Cabinet Office stated that –


We agree with this comment. While we would support additional requirements that were essential to consumer protection, we do not approve of minimum harmonisation unless absolutely necessary – especially now that EU legislation has become a mature and detailed body of law. One of the Better Regulation Commission's principles is that "New regulations should take account of other existing or proposed regulations, whether of domestic, EU or international origin".

20.    Similarly, when EU law is to be implemented in the UK, the Government should ensure that any domestic laws covering the same, or similar, ground are thoroughly examined with a strong presumption that they will be repealed when the directive is implemented in the UK, unless there are clearly demonstrable reasons why this should not be done. Indeed, another principle of the Better Regulation Commission is that "Regulations should be systematically reviewed to test whether they are still necessary and effective. If not, they should be modified or
eliminated".

21.    Therefore, we also recommend –

1(b) That prospective UK legislation usually be held-over if EC law, covering substantially the same ground, is expected to be introduced. 1(c) That the UK should not 'gold plate' EU law, unless there is a clear demonstrable reason for doing so. 1(d) That domestic laws covering subtantially the same ground as an EU regulation or directive should be replaced when the EU law becomes law in the UK.

22.    The EU has, since publishing its Action Plan on a Coherent European Contract Law, been examining ways to simplify EU legislation. Most recently, it has been examining its consumer acquis and a green paper (COM (2006) 744) suggested three options for the review of a range of EU consumer protection directives (unfair terms, timeshare, distance selling etc) that comprise the acquis; namely -

• option I – the 'vertical approach' – continuing to amend Directives individually and separately.
• option II – the 'mixed approach' – framing concepts horizontally across different regulations, with vertical action only where necessary.
• option III – no legislative action.

 
23.    The BSA's response acknowledged the clear benefits of option II, but also noted that –


A majority of respondents called for the adoption of a horizontal legislative instrument applicable to domestic and cross-border transactions, based on full
targeted harmonisation. 

24.    Our final recommendation regarding EU law is as follows –

1(e) That the UK should support harmonisation of EU laws long-term.

25.    In late 2007, the BSA consulted its members about deregulation. The exercise was partly in anticipation of other consultations, including the Hunt Review of the FOS, BERR's current consultation, and the FSA's forthcoming review of the regulation of deposit-taking. It was also designed to help the BSA form a policy position on the specifics of deregulation.
 
26.    There was a broad view among those responding that the overall fair play regime was too complicated and had too many overlaps. The advantages of simplification would include easier compliance, a more consistent regulatory approach, greater business flexibility, greater clarity for both firms and customers, and reduction in the risk of double jeopardy.

27.    Some of the responses mirrored the point that the BSA has often made; namely, that there are now enough fairness requirements, and businesses (including the vast majority that believe in TCF) would welcome a lengthy period of stability, to cope with the excessively regulated environment, without yet more fairness proposals being put forward.

28.    For example, despite the fact that deposit-taking, unlike mortgages and insurance, is not formally product regulated – the FSA is currently examining this matter - all of the following general or specific fair play mechanisms (legal, regulatory or code of practice) currently apply to this 'unregulated' product area -

• The FSA's Fairness Principles and Treating Customers Fairly (TCF)
• Consumer Protection Regulations 2008 under the Unfair Commercial Practices Directive (plus the OFT guidance)
• The Banking Code
• The Misrepresentation Act 1967
• Code of Practice for the Advertising of Interest Bearing Accounts (the Advertising Code)
• The Financial Services (Distance Marketing Regulations) 2004
• The Unfair Terms in Consumer Contract Regulations 1999 (plus FSA statements and UNCOG)
• The Unfair Contract Terms Act 1977
• Penalties/liquidated damages (common law) and various other common law provisions
• Services elements of the Supply of Goods and Services Act 1982
• FSA Dispute Rules (DISP)
• The Financial Ombudsman Service

29.    Pre-contractual fairness is specifically covered by a range of – sometimes overlapping - provisions, ie the Consumer Protection Regulations from Unfair Trading Regulations 2008 (which also cover unfair commercial practices post-contract), the Misrepresentation Act 1967, the Advertising Code, and the Financial Services (Distance Marketing Regulations) 2004.

30.    We already have numerous laws specifically dealing with contractual terms (notably, the Unfair Terms in Consumer Contracts Regulations 1999, the Unfair Contract Terms Act 1977, and the common law doctrine of penalties).

31.    Since the Consumer Protection from Unfair Trading Regulations 2008 cover non-contractual unfair practices, both pre and post-contract, when they are placed alongside the Unfair Terms in Consumer Contracts Regulations 1999, the UK has a complete statutory code on fairness, ie both contractual and non-contractual fairness.

32.    Furthermore, in respect of banking and savings, most banks and building societies subscribe to the Banking Code, which is monitored and enforced by the Banking Code Standards Board and has been very successful in ensuring good banking standards. Firms are also implementing the FSA's principles-based approach to TCF within their ogranisations, which covers fairness in the round ie as a cultural matter.

33.    Finally, should (despite all these measures) stray acts of unfairness occur, a consumer may complain to the Financial Ombudsman Service, which has wide powers to order redress.

34.    If such a plethora of fairness mechanisms fails to ensure fairness in practice, then the fault is not a lack of such mechanisms, but a failure of enforcement by the relevant authorities. Therefore, our recommendation is -

2(a) That no new consumer protection legislation should be introduced, unless clearly required by the EU - the onus must be on the authorities to enforce the mechanisms already available.

35.    There are, no doubt, some areas where sensible simplification could take place, separate from the consumer acquis work (see above). For example, The Law Commission described the law on unfair contract terms as "unnecessarily complicated and difficult". In a joint report with the Scottish Law Commission in 2005, it recommended merging the 1977 Act with the Unfair Terms in Consumer Contracts Regulations 1999 into a single, unified piece of legislation. The Government accepted the recommendations and the DBERR is seeking an opportunity to implement them as soon as practicable. This would be a fairly modest measure, but would be a step in the right direction.

36.    Professor Hugh Beale, of the University of Warwick, made pertinent comments in a recent discussion of the unfair terms legislation; he suggested –


The 1999 Regulations, largely by following a copy-out approach from a poorly drafted directive, failed to provide coherent legislation.

37.    Nevertheless, caution has to be exercised in 'domesticating' EU law. For instance, at one point BERR suggested a simplification of the Unfair Commercial Practices Directive in the UK draft implementing regulations (by merging the vulnerable consumer concept into an 'average consumer' term) that, while intended to be helpful, would have had unintended consequences. Therefore, while (so far as permitted) EU Directives should be cast, in UK implementing laws, in language familiar to the UK, this should not be at the expense of intentional or inadvertent 'gold-plating'.

38.    The UK's consumer credit legislation is (despite the recent overhaul) particularly complicated and, as such, has very unhelpful elements for both businesses and consumers, notably in relation to credit products attached to mortgages.  In 2001, the CBI stated explained that –


In so far as allowed by the EU, we believe that a rationalisation and simplification of this legislation is needed.

40.    Therefore, our next recommendation is as follows –

2(b) That consumer laws should be simplified and harmonised, as and when, and to the extent, practicable to do so.

41.    One of the main reasons that the Association welcomed the FSA's principles-based approach to TCF was that it would enable firms to examine TCF, and embed it within their organisations, in a way that could be sensibly tailored to their organisational culture, scale and business operations, rather than having to deal with a new set of prescriptive rules. Both the FSA and the OFT support principles-based regulation (PBR).

42.    PBR also allows for a considerable element of 'future-proofing', which is seldom available in prescriptive regulations. For example, the Consumer Protection Regulations from Unfair Trading Regulations 2008, by following a generally PBR approach, appear to be largely future-proof.

41.    However, just as it brings with it helpful flexibility, PBR can cause uncertainty. The BSA has examined PBR in detail and Appendix 3 to this paper is a copy of the BSA's policy position on PBR.

43.     As an aside, it is worth mentioning that even 'prescriptive' rules are often, in
fact, drafted in a way that leads to further confusion. For example, the poor drafting of the Unfair Terms in Consumer Contracts Regulations 1999 presented difficulties for firms, regulators and consumers for many years – these are gradually being clarified by court judgments.

44.    The advantages of PBR, if conducted properly, appear to outweigh the disadvantages. In addition, PBR is more suited to the kind of 'future proofing' approach being advocated by the EU eg in respect of the consumer acquis. Therefore, we recommend -

2(c) That, wherever practicable, regulators should follow a PBR approach.

45.    The wide-ranging contents of Appendix 1 suggest that, over the years, there has not been a properly joined up approach in relation to 'fair-play' mechanisms. Whether or not that is true, one thing is certain – if it were possible to begin again with a blank piece of paper, the authors of a coherent regime, would not come up with what we now have.

46.    In recent years, there has been more evidence of a joined-up approach, eg the FSA has taken into account the other fair play arrangements as it has developed its TCF programmes, the OFT similarly had regard to other requirements eg in preparing guidance on 'unfair relationships' under the consumer credit legislation, and – as noted above – the FSA and the OFT co-ordinate many of their respective activities. It is already one of the 5 principles of good regulation, published by the Better Regulation Commission, that "Government rules and standards must be joined-up and implemented fairly".

47.    It is imperative that the, new found, joined-up approach continue. For example, as discussed above, the EU agenda must always be considered and, as a case in point, the diseconomies of bringing in domestic provisions when new EU legislation on the same subject matter is in the pipeline. For instance, at present the Government plans to introduce new legislation on equality even though similar EU provisions are in the pipeline. Therefore, we recommend –

3(a) That law-makers, regulators and others take a joined-up approach when developing fairness arrangements for which they are responsible.

48.    The FSA was designed to be the single regulator for financial services industry, but this objective has not entirely been realised because the OFT is the regulator for many FSA-regulated firms in respect of consumer credit. This means, for example, that if credit is sold with payment protection insurance, the FSA will be the regulator for the PPI but the OFT will be the regulator for the credit. On the face of it, this should not be a major problem, especially as the FSA and the OFT work hard to co-ordinate their responsibilities (see below).

49.    However, in 2005 the Hampton Review suggested that the Government may want to consider whether the consumer credit functions of the OFT should pass to the Financial Services Authority (paragraph 4.50). Indeed, the Hampton Report recommended, among other things "consolidation in national regulators to create a simpler, more consistent structure" www.hm-treasury.gov.uk/media/7/F/bud05hamptonv1.pdf. It is interesting to note that, the joint FSA/OFT publication Delivering better regulatory outcomes – May 2008 update, reported joint regulatory work on all of the following subjects –

• personal bank account pricing
• credit card interest calculation *
• credit advertising *
• retail distribution review
• PPI *
• with-profits funds
• communications with consumers
• Consumer Credit Act 2006 *
• mortgage arrears *
• sale and rent back
• Unfair Commercial Practices Directive
• anti-money laundering responsibilities
• Payment Services Directive.

50.    While, on the one hand, this degree of co-ordination is laudable - and consistent with the 'joined-up' approach we advocate above - the need for such a high-level of co-ordinationed activity gives rise, on the other hand, to further questions about the FSA's single financial regulator status. The topics indicated with an asterisk are those that, as far as we can ascertain, require co-ordination between the OFT and the FSA because of the former's responsibilities in respect of consumer credit. Others stem from different matters, notably the OFT's responsibilities regarding competition.

51.    We think it would make sense to review whether or not the FSA should take responsibility for consumer credit. While such a change would not – and, indeed, should not – mean that the FSA and the OFT no longer needed to co-ordinate, it would harmonise the regulatory picture in the following, useful, clear-cut way –

FSA	OFT
The body that regulates the financial services industry in the UK.	The consumer and competition authority, with the mission to make markets work well for consumers.

52.     The BSA has no hard-and-fast policy on this matter – the details of which are too complicated to cover in this paper. Nevertheless, it would be sensible for the Government to review the advantages and disadvantages of passing the OFT's consumer credit functions to the FSA. Therefore, we additionally recommend –

3(b) That the Government investigate whether or not the OFT's consumer credit functions should be passed to the FSA.

53.     Consumer are entitled to know their rights and responsibilities in respect of financial services. The former has been addressed in many quarters, and the BSA strongly supports consumers knowing their rights. However, little has been done to communicate consumers' responsibilities. The Association has produced a paper on the matter (see appendix 4) and has been in contact with the FSA and the OFT. A programme of work is planned. Accordingly, we recommend –

4 That the matter of consumers' responsibilities be full addressed.

54.     The building society sector, in common with all other financial sectors whose firms are subject to the FOS arrangements, benefit from having a strong, independent complaints adjudicator. However, the Ombudsman is increasingly called upon to act in a quasi-regulatory capacity. In our 2004 response to the FSMA two-year review www.bsa.org.uk/policy/response/hunt.htm, we stated that -



55.      Nevertheless, problems remain. As recently as July 2008, the Chief Ombudsman (in proposing that PPI complaints be dealt with through the WI procedures) stated that –


56.     The BSA agrees with the Chief Ombudsman's comments about systemic issues. We support the WI procedures in principle, but are yet to be convinced that they function effectively in practice. For one thing, greater transparency regarding the application of the procedures is required. For example, we understand that the WI procedures were regarded as having been triggered in relation to cheque fraud (in 2006) and current account charges (ie in relation to the subject matter of the current High court 'test case'). However, although the BSA was closely involved in these matters, we did not perceive that they were being progressed through WI.

57.     As noted, we continue to support the WI arrangements but, if they ultimately proved ineffective, a more radical approach would be required. The BSA set out details of such a possible approach in its response to the FSMA two-year review (see above) and referred to it again in our response to the Hunt Review in early 2008 www.bsa.org.uk/policy/response/hunt.htm. A second, more modest, change in the current arrangements, which merits serious analysis, is that of requiring the FOS to be bound by the law – details of which were also included in our response to the Hunt Review. Our final recommendation is –

5 That the WI procedures be made more transparent  and, should they fail to be effective, that more radical measures (including the right to have certain ombudsman decisions reviewed and that the FOS be bound by law) be seriously considered.

Conclusion

58.         Successive Governments have been committed to deregulation for over 20 years* – yet still the regulations pile up to the detriment of clarity for consumers and against the interests of the UK economy.  Now is the time for a clear commitment to deregulation that goes beyond words and includes deeds.  Many appropriate principles are already in place (through, for example, the Better Regulation Executive) but these mean little unless they are applied effectively in practice.  The UK financial services industry and its customers deserve clear, coherent consumer laws and we commend the Association’s 12-point plan to Government.