Consumer credit - 10 things you need to know
Firms offering credit to consumers are currently licensed and regulated by the Office of Fair Trading. In March 2013, the Government and Financial Services Authority (FSA) published proposals to transfer the responsibility for consumer credit regulation away from the OFT.
On 15 July 2013, the FSA’s successor, the Financial Conduct Authority (the FCA) confirmed that firms would need to begin the process of transferring from the OFT to the FCA in September 2013.
Prior to this date, firms carrying on consumer credit business (including businesses providing loans, overdrafts, debt collection, credit intermediaries and debt advisers) will need to consider the impact of the transfer, and the consequences of being regulated by a tougher, more proactive regulator, on their business.
In the first of a series of articles, we consider 10 key issues firms should be considering.
1. When is the transfer happening and what does it mean?
As part of changes to the structure of the regulatory regime in the UK, the Government decided to transfer regulation of consumer credit to the FCA in order to establish a conduct of business regulator which, for the first time, regulates all retail financial services including consumer credit.
In transferring consumer credit regulation from the OFT to the FCA, the Government has two guiding principles:
- that consumers should be better protected; and
- that the regulatory regime should be proportionate to the types of firms and risks posed by them.
It is expected that the FCA will be a tougher and more proactive regulator than both the FSA and the OFT, with powers to tackle consumer detriment. This includes a new product intervention power, which will enable the FCA to ban or impose requirements on financial products and aims to prevent consumer detriment.
Transfer of regulation from the OFT to the FCA takes place in April 2014.
2. Transition to the FCA regime: Interim Permissions
On 1 April 2014, firms which currently hold licences with the OFT will transfer to the FCA regime.
By this date, all licensed firms will need to notify the FCA that they want an ‘interim permission’. As part of the notification, firms will need to:
- request a log-in from the FCA website using their OFT licence number and email address
- check the information listed about the firm on the OFT register
- validate or update the OFT’s information on the firm’s contact details and controllers and a list of the consumer credit activities that the firm is currently licensed to undertake.
Firms can register their intention to carry on providing consumer credit activities online from September 2013 and will be charged a fee, currently proposed at £150 for sole traders and £350 for most other firms.
OFT licences will expire on 31 March 2014 and firms will only be eligible to carry on activities for which they have a current OFT licence on 1 April 2014 following the FCA notification.
The FCA may also ask firms for other types of information on a voluntary basis, such as turnover, complaints information, number and location of branches and transaction information.
3. Authorisation by the FCA
A firm’s interim permission will be valid until 1 April 2016. By that date, every firm with an interim permission will need to apply for, and obtain, a full authorisation from the FCA.
Firms will need to meet certain ‘Threshold Conditions’, which are minimum standards set out in the Financial Services and Markets Act 2000. In assessing whether a firm meets these Threshold Conditions, the FCA proposes that they will be modified for firms undertaking ‘lower-risk regulated activities’.
Lower risk activities
Lending activities where a firm’s main business is to sell goods and non-financial services will be deemed to be lower-risk, if there is no interest or charges payable on that credit.
Credit broking, whereby a firm’s credit activities is a secondary activity to selling goods and non-financial services will also be lower-risk e.g. a car dealership which introduces customers to lenders.
Consumer hire, where goods (such as cars) are hired to consumers, will be a lower risk activity.
Firms undertaking lower risk activities will hold ‘limited permissions’ and be subject to a more restrictive regulatory regime and will significantly reduce the amount of information they have to provide to the FCA.
Higher risk activities
Lending where a firm’s main business is financial services e.g. providing personal loans, credit cards, overdrafts, hire purchase etc will be a higher risk activity.
Introducing consumers to lenders where a firm’s main business is financial services will also be higher risk.
Debt collection, debt administration and operating a peer-to-peer platform for lending will also be higher risk.
4. Appointed Representatives
Authorisation by the FCA can be a time-consuming and expensive process which will not be appropriate for all consumer credit firms. The FCA has made it clear that certain consumer credit firms can avoid the need to be authorised by becoming an ‘appointed representative’ of an authorised firm.
An appointed representative is a firm that has a contract with an authorised firm, known as a ‘principal’, under which the principal accepts responsibility for the appointed representative’s actions.
If a firm is a credit intermediary, for example, a firm which acts for a number of lenders, the appointed representative route may be appropriate.
However, if a firm lends money to consumers or act as a credit reference agency, the appointed representative route will not be available.
An appointed representative can act for one principal or for multiple principals. The FCA has stated that a debt collection firm will need to be clear which lender it acts for and so, if it wants to become an appointed representative, can only do so by working for one principal.
5. Prudential Requirements
Broadly speaking, becoming authorised by the FCA will not require consumer credit firms to meet specific prudential standards i.e. holding a minimum level of capital, although all consumer credit firms will have to hold ‘adequate financial resources’ to keep their FCA authorisation.
The exception to this is for debt management firms, as the FCA considers these firms to pose a high risk to consumers because they may hold and/or control clients’ money (e.g. debt repayments). Although subject to consultation, the FCA’s proposals are that debt management firms will be required to hold capital equal to 2.5% of turnover, with a minimum amount of £5000.
6. OFT guidance into FCA rules
In April 2014, the FCA will regulate credit firms in respect of conduct, both on a forward and backward-looking basis. As part of this, the FCA proposes that guidance currently published by the OFT will be turned into either FCA rules or FCA guidance.
The FCA predicts that firms which already comply with the OFT guidance will be unlikely to need to change their behaviour. However, the prescriptive nature of requirements under the CCA and guidance published by the OFT have, at times, been interpreted in a flexible way by some firms and it is likely that this approach will need to be modified when regulation moves to the new regulator.
7. Approved Persons
Under the old regime, the OFT monitored a licence holder’s fitness to hold the licence, which included taking account of the conduct of the firm’s employees, agents and controllers.
Under the new regime, the FCA will apply the ‘approved persons’ regime which already applies to financial services firms. The FCA will require individuals in consumer credit firms who will be carrying out significant or management functions (known as ‘controlled functions’) to be approved by the FCA before they do so.
This will mean that CEOs, directors and other senior management will need to be individually approved by the FCA by 2016. The approved persons regime is well-established under FSMA and means that approved persons will be personally liable for the actions of an FCA-authorised firm. The FCA’s powers include the ability to fine an approved person or to ban them from working within the financial services industry for any length of time.
Firms which hold a limited permission will only have to have one person pre-approved by the FCA.
8. Financial Promotions
The current regulations in the CCA on credit advertising are due to be abolished for most firms and replaced with the application of the financial promotions regime in FSMA. Firms undergoing debt collection, debt administration and some other services will, however, will be subject to the old regime going forward.
9. Money Laundering
Most firms that are consumer credit businesses, but which are not currently regulated by the FSA, are subject to the requirements of the Money Laundering Regulations 2007 and regulated by the OFT.
Going forward, under the FCA, relevant credit firms will be required to appoint a Money Laundering Reporting Officer located in the UK, unless that firm is a sole trader. The FCA will also expect that senior management will be given responsibility for establishing and monitoring anti-money laundering systems and controls.
10. A cap on interest rates?
As part of the transfer, the Government has provided the FCA with a specific power to cap the overall costs of loans, restrict how long they could last for and amount of times they could be rolled over.
Current research carried out by the FCA suggests that introducing a cap to interest rates on loans would not prevent consumer detriment in, for example, the payday lending market. Therefore, there is currently no proposal to introduce a cap on interest rates, although the FCA will continue to monitor this to decide whether to do so in the future.