It is not too soon for consumer credit firms to start planning for life under another regulator. Andrew Barber, Emma Radmore and Juan Jose Manchado explain the proposed new framework and its key elements.
HM Treasury (Treasury) and the Financial Conduct Authority (FCA) keep taking steps towards the transfer, from 1 April 2014, of consumer credit regulation to FCA. Treasury made, on 25 July, the Orders setting out who will regulate what. FCA's consultation on its approach to its new role and powers is now closed, but it has yet to publish its feedback and the final Policy Statement. The new regime aims to balance out the guiding principles of strengthened consumer protection and proportionality.
Consumer credit will be subject to the authorisation, redress and enforcement rules in the Financial Services and Markets Act 2000 (FSMA). FCA will get rule-making powers over these building blocks of the FSMA model and over prudential and conduct standards. Some rules in the Consumer Credit Act 1974 (CCA) will be kept, namely those on form and content of agreements, their enforceability and some criminal sanctions. FCA has also been given a power to designate CCA-subordinate legislation as having been made by FCA.
In this article, Andrew Barber, Emma Radmore and Juan Jose Manchado look at the key elements of the new framework.
New regulated activities
Consistent with the aim of bringing consumer credit within FSMA, Treasury proposes to amend the Regulated Activities Order to carry across many key definitions and activities from the CCA. Changes include:
- carrying across with minor changes the definitions of "consumer credit agreement", "regulated agreement", "credit", "running account credit", "fixed sum credit", "restricted use credit agreement", "unrestricted use credit agreement", "consumer hire agreement" and "regulated consumer hire agreement" and the concepts of credit brokerage, debt adjusting, debt counselling, debt collecting, debt administration, credit information services and credit reference agency;
- changing some terminology when carrying across other definitions, so that, generally, "borrower" and "lender" replace "debtor" and "creditor", so there are now definitions for "borrower-lender-supplier agreement" in place of "debtor-creditor-supplier agreement" and "borrower-lender agreement" in place of "debtor-creditor agreement";
- not carrying forward the expanded definition of "individual" from the CCA, but replacing it with a new term "relevant recipient of credit";
- transferring exemptions, in particular the high net worth and business exemptions, and prescribing that the detailed rules relating to these, as well as the rules on total charge for credit, be made by FCA; and
- inserting new regulated activities of:< >credit broking (encompassing broking and intermediation, which means a small number of firms who under the CCA carry on credit intermediation and not credit brokerage will now need authorisation for the first time);operating an electronic system in relation to lending (such as running a peer-to-peer platform, so that consumers who borrow and those who lend via a platform are protected);debt adjusting;debt counselling (which will include bringing not-for-profit debt advisory firms within regulation but will apply a proportionate regime to these firms);debt collecting: this will not include the activities of third party tracing agents whose only activity is to carry on tracing activities but which do not themselves lend or carry on debt collection activities, which means these entities will no longer require regulation;debt administration;entering into etc a regulated credit agreement as lender, extending the current scope of regulation so it covers first and second charge lending. These requirements will be subject to further change when the UK implements the Mortgage Credit Directive;entering into a regulated consumer hire agreement as owner or exercising, or having the right to exercise, the owner's rights and duties under a regulated consumer hire agreement;providing credit information services; andproviding credit references.
Treasury will carry forward the exemption for agents of mail order firms, so they will not need to seek authorisation in their own right, and also intends that agents of home-collected credit firms will not need authorisation where they meet certain conditions. FCA Perimeter Guidance will explain the regulatory status of these entities. The Government is also considering regulating lead generation in relation to debt, but will decide whether and if so how to do this separately. Currently, lead generators selling leads to creditors and credit brokers require a licence but those selling leads to providers of debt advice do not.
Change in control
Treasury plans to apply a new set of thresholds for change of control notifications for consumer credit firms. Authorised firms carrying on only consumer credit activities will need to notify when surpassing or falling below a threshold of 33 per cent.
FCA approach to consumer credit
FSA's paper explains how FCA will apply parts of its rules to consumer credit firms. It acknowledges the activities it views as, respectively, lower or higher risk. The lower-risk activities are lending where the main business of the firm is selling goods and non-financial services and there is no interest or charges (such as gyms that allow interest-free payments by instalments), secondary credit broking, consumer hire, not-for-profit debt counselling and adjusting, and not-for-profit credit information service. Other matters FSA's paper addresses include:
- the threshold conditions, which it will assess according to the risk category of the firm. Only higher-risk firms would need to submit a detailed business plan;
- approved persons: FCA proposes to apply most of the significant influence and required functions to consumer credit firms except those with limited permissions. The "apportionment and oversight" function will apply to most limited permission firms, while the compliance oversight function will apply to debt-management and credit-repair businesses. All firms covered by the Money Laundering Regulations must appoint a person to the Money Laundering Reporting function. Employees in consumer-facing roles will not need pre-approval. There will be a requirement for debt-management firms to appoint a person to the role of "protecting clients' money and assets";
- Principles for Businesses, high-level standards and conduct standards, the last based also on CCA rules and on existing guidance and industry codes. Certain rules within the senior management arrangements, systems and controls sourcebook will also apply;
- the firm systematic framework (FSF) for supervision, which will apply proportionately to consumer credit firms. For higher-risk firms, FCA would plan targeted and proactive supervision, according to the risk profile of the firm, and for lower-risk firms there would be limited reactive responses with some possible thematic work;
- most firms will be free from capital requirements (the exception would be debt-management firms) and from payments towards the Financial Services Compensation Scheme; and
- financial crime compliance, enforcement and redress, including product intervention powers and consumer redress schemes.
Authorisation and permissions
Treasury proposes a two-tiered approach to regulation, with a "limited permission" regime for specific lower-risk firms, including those for whom provision of credit is a secondary activity. FCA would also reduce the regulatory burden on lower-risk firms holding a "limited permission". These include consumer credit lending with no interest or charges, consumer hire, and credit broking as a secondary activity. "Limited permission" firms will be subject only to reactive supervision, face fewer information requirements and pay less in fees. They might also consider becoming appointed representatives. The consumer credit group licensing regime will not carry forward to the new regime, so groups will need to restructure, possibly taking advantage of the appointed representative regime. The alternative of being an appointed representative will not be available to lenders and credit reference agencies, which will then require full authorisation. Limited permission firms will not themselves be allowed to act as principal in appointed representative arrangements.
Treasury's plan is to adapt the appointed representative regime to make an exception to the general rule that one single firm cannot be both authorised for some regulated activities yet exempt for others. Treasury acknowledges that many CCA-licensed firms, often secondary credit brokers, are appointed representatives of FCA-authorised firms selling non-investment insurance. Treasury has decided it would be disproportionate to require any consumer credit firm that falls within the limited permission regime and which is currently an appointed representative to have to apply for full authorisation for the activities currently covered by the appointed representative arrangements. It proposes that these firms will be able to remain appointed representatives for activities to which the appointed representative regime applies. But this is available only to limited permission firms – all other firms would have to have the additional activities directly within their permissions.
The current FSMA regime for professional firms carrying on regulated activities in certain circumstances will apply equally to consumer credit activities.
With the principle of proportionality also in mind, FSMA's change of control regime will be made more proportionate.
The consultations touch on a number of conduct and market issues where FCA may need to take a proportionate approach, which will often be based on different considerations and underlying law from the current FSMA-style regime.
For example, many consumer credit advertisements can and should be brought within the scope of the financial promotion regime. Although provision of business credit, debt collection or administration, credit information services and credit references in some cases will be regulated activities they will not be "controlled activities" for the purposes of the financial promotion regime.
Treasury sees a number of areas of consumer protection that will improve with the transfer of regulation. It identified:
- Regulatory gateway: Treasury sees benefits in greater scrutiny of applicants and existing firms, which will better identify high-risk or rogue firms at an early stage. Added to this, the introduction of the approved persons regime will boost compliance.
- Supervision: FCA's style of more intensive monitoring, and its ability to take a market-wide approach, should help in dealing with problems earlier.
- Rules: FCA-style regulation will introduce high-level principles and a quicker and more flexible rule-making process. FCA also has its new product intervention powers.
- Enforcement: FCA has a large enforcement toolkit, broader sanctioning powers and a more proactive approach to discipline and enforcement.
- Complaints and redress: FCA has greater powers to require firms to reimburse customers, and prudential requirements on debt-management firms will protect consumers' money.
Transition to the new regime
Treasury and FSA propose offering interim permissions so firms licensed by the Office for Fair Trading (OFT) can carry on activities before they have made a full application for authorisation from FCA. Existing OFT licence holders will be allowed to apply for interim permission from Autumn 2013, and will have to provide limited information and pay a one-off fee to FCA. Interim permissions will begin from 1 April 2014 and OFT licences will lapse. Firms will then have until 2016 to obtain full authorisation. The interim permission regime will be available to firms who are currently licensed only by OFT and to those OFT licensed firms who also hold a FSMA authorisation for non-consumer-credit activities, in each case so long as the relevant licences are in place on 31 March 2014. The interim permissions regime will not apply to group licences, so firms which hold such a licence will need to have decided how to deal with the licensable activities they carry on in time to be compliant from 1 April 2014.
FCA plans several further consultations during 2013, and plans to finalise its rules in March 2014.
What this will mean for CCA firms
CCA firms that are not used to the more intrusive FSA and now FCA style of regulation will feel significant change. Following the perception of OFT as a regulator without teeth, FCA is likely to want to show firms the standards of behaviour it expects. Compliance with a detailed rule book importing high-level standards as well as conduct of business requirements, applying the FCA supervision approach and placing direct responsibilities on key individuals through the approved persons regime should all lead to significant work for CCA-licensed firms in the run up to the transfer.
The move to apply risk categories to consumer credit firms means those that have businesses that sit across both risk categories will have to consider how they want to structure their businesses after the transfer. It may be that firms want to restructure to allow some firms within a wider group to undertake only lower-risk activities and thus be subject to reactive supervision with lower information requirements and fees.
It is not too soon to start planning.