Consumer credit regulation is expected to transfer from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) from 1 April 2014. Activities currently licensable under the Consumer Credit Act 1974 (CCA) will transfer to the Financial Services and Markets Act 2000 (FSMA) (Regulated Activities) Order 2001 (the RAO). CCA firms will be subject to FCA-style authorisation, prudential, conduct of business, redress and enforcement rules. Much of the CCA will be retained, but its licensing and related provisions will transfer to the RAO or other FSMA-derived legislation.
Changes to the RAO
Treasury has put before Parliament a draft order to amend the RAO to carry across many key definitions and activities from the CCA. For example, it will carry over the definitions of consumer credit, consumer hire and regulated agreements, and of the different forms of credit. It will transfer key exemptions such as the high net worth and business exemptions. Other definitions will change slightly to be more consistent with FSMA style.
The consumer credit regulated activities requiring FCA authorisation instead of an OFT licence will be:
- credit broking (including broking and intermediation);
- operating an electronic system in relation to lending (such as running a certain peer-to-peer platforms);
- debt adjusting;
- debt counselling (including if not-for-profit);
- debt collecting (but excluding third party tracing agents who only carry on tracing activities but do not lend or carry on debt collection activities);
- debt administration;
- entering into and other activities relating to a regulated credit agreement as lender (covering both first and second charge lending);
- providing credit information services; and
- providing credit references.
The effect of the changes is that a few firms that do not need a CCA licence may require FCA authorisation (such as operators of peer-to-peer lending platforms and not-for-profit debt counsellors), while a few firms that currently require a CCA licence may not require FCA authorisation (specifically, the third party tracing agents referred to above).
FCA plans to apply proportionate regulation depending on whether activities are lower or higher risk. Lower risk activities include lending where the main business of the firm is selling goods and non-financial services and there is no interest or charges (such as interest-free membership instalments), secondary credit broking, consumer hire, not-for-profit debt counselling and adjusting, and not-for-profit credit information services. Certain low risk firms may benefit from a "limited permission" regime, which means FCA will not apply some of the requirements listed below to them.
High risk firms (major lenders) will need to comply with FCA requirements familiar to firms already regulated under FSMA, such as:
- the threshold conditions, which will apply according to the firm's risk category;
- approved persons: there will be no "customer function" requirement, but all firms except limited permission firms will have to appoint approved persons to significant influence functions (such as CEO and director);
- Principles for Businesses, high-level standards and conduct standards, the latter based also on CCA rules and on existing guidance and industry codes;
- the firm systematic framework (FSF) for supervision, which will apply proportionately depending on the risk category;
- capital requirements (but only for debt management firms); and
- financial crime compliance, enforcement and redress, including product intervention powers and consumer redress schemes.
Other key changes and considerations
Other key changes include:
- there will be no equivalent to the CCA group licensing regime;
- generally, CCA-authorised firms which are currently appointed representatives of FSMA-authorised firms will have to extend their new FSMA permissions to include the activities that are the subject of the "appointment". Treasury proposes that limited permission firms be the exception to this rule, so they can for instance remain appointed representatives for insurance mediation activity. Groups might consider using the appointed representative regime to manage the disappearance of the group licence;
- more intensive supervision, both at entry to regulation, and through continuing supervision and enforcement. OFT has been criticised by being a reactive and light touch regulator. Since February this year, it has greater enforcement powers, and the new FCA-style of enforcement should challenge firms even more.
Transition to the new regime
Treasury and FCA propose offering interim permissions so firms licensed by OFT can carry on activities pending full FCA authorisation. They plan to allow firms to start making these applications from September 2013. Any interim permissions will become effective from 1 April 2014 and OFT licences will lapse. Firms will then have until 2016 to obtain full authorisation. The interim permissions regime will not apply to groups managing the transition from CCA group licences.
What should CCA firms do?
If the timetable goes to plan, there is not much time left. CCA firms should urgently assess what FCA authorisations they will require from 2014, and plan for any restructurings necessary. Firms should be ready to submit their interim permission applications and should start now to assess their compliance procedures against the likely FCA standards. FCA's feedback on its first consultation is imminent, with more consultations promised before implementation of the new regime. But firms cannot wait for final rules before taking action.