Who should regulate the consumer credit market and to what extent, has been the subject of much debate. Credit activities are currently regulated by the Office of Fair Trading (OFT), but the Government’s Financial Services Bill could result in the new Financial Conduct Authority (FCA) assuming this responsibility.

The Finance and Leasing Association (FLA) has been active in campaigning on this issue. In January 2012, FLA Director General Stephen Sklaroff suggested that the FCA might not be an appropriate regulator for the credit industry, by commenting that, “the regime which the FCA will inherit in the deposit and savings markets is not appropriate for credit, and would put at risk a significant amount of responsible and economically vital consumer and small business lending.”

However, it must be noted that the Financial Services Authority (FSA) has regulated the first-charge mortgage market in the UK since 2005, and that clearly many of the consumer credit activities currently regulated by the OFT bear similarities to the mortgage market. The FCA will be one of two successor bodies to the FSA when the Bill becomes law early in 2013.

Early in 2012 it seemed that the FLA may have earned a partial victory when HM Treasury issued a statement promising that, “The Government will exercise these powers if and when it has identified a model of FCA regulation that is proportionate for the different segments of the consumer credit market. The exercise of these powers will be subject to impact assessment and the approval of both Houses of Parliament.”

The Government’s Business, Innovation and Skills Committee has devoted a lot of time recently to the payday lending sector, one of the most controversial areas of consumer credit. Payday lenders say they are providing vital credit to those who would not otherwise be able to borrow; while opponents of payday lending comment on the very high interest rates and the lenders’ failure to check credit worthiness and affordability.

The Committee has been successful in getting four trade associations, including the FLA, to improve their Codes of Practice for payday lending. Together, the four associations represent around 90% of the payday lending market. These improvements will take effect from November 2012, and include commitments regarding increased transparency regarding repayments, restrictions on lenders’ ability to extend the term of a loan and commitments to carry out rigorous affordability assessments and credit checks.

In June 2012, the Committee suggested that its preference was for the industry to voluntarily improve its own standards, rather than have statutory regulation imposed. “The Government’s strong preference is to promote responsible corporate and consumer behaviour through a voluntary approach,” it said. “By working with industry, we can deliver real improvements for consumers far more quickly than waiting for legislation.”

The OFT will reveal by the end of 2012 the results of its comprehensive review of the payday lending sector. This could lead to tougher OFT guidance being issued and perhaps disciplinary action being taken. The OFT has the power to remove the Consumer Credit License of any firm it finds has acted improperly, and firms cannot operate in the credit markets without this licence.