The New Government Material
First, the Government has published its Summary of Responses to its and the FCA's initial Consultations. It's nothing if not a summary - it's quite extraordinarily brief and tells us very little other than that they are carrying on regardless and determined to meet their timetable. One welcome thing it does say, though, is that they are postponing, as they were begged to do, any change to the regulatory framework for second charge mortgages until the EU Mortgages Directive is finalised, probably at the end of this year, so affected firms only need to change their systems once. More detailed than the Summary are the amendments to the Impact Assessment made available with the Summary - more on which below.
Secondly, and much more to the point, two draft Statutory Instruments have been laid before Parliament. These are the snappily titled: 'The Financial Services Act 2012 (Consumer Credit) Order 2013'; and 'The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013'. Our main concern is with the latter of these (the "Regulated Activities Order" or "RAO") as it contains much of the proposed detail, bringing across as it does into the FSMA regime equivalent provisions to those in the CCA as to what constitutes a regulated consumer credit or consumer hire agreement, what the exemptions are, a new definition of credit broking (including provisions applicable to the legal profession), provisions to replace the current CCA licence categories, and, for example, the methodology for applying for interim permission (i.e. the regime allowing existing CCA licence-holders to continue to trade after the commencement date of the RAO on 1 April 2014 notwithstanding that they do not yet have full FCA authorisation). The intention is that such interim permissions will be able to be applied for between 2 September 2013 and 31 March 2014.
The Government's Next Steps
Everything is being done in a tremendous rush and it's going to lead to mistakes. The Government wants these Statutory Instruments passed through both Houses of Parliament under the affirmative procedure (which means that they are debated and not just laid, though the extent of meaningful debate is open to doubt) before Parliament rises for the summer. It seems that the only reason for this apparently ludicrous timetable is to ensure that existing licence-holders are able, as planned, to apply for interim permissions as from 2nd September of this year. But this is quite unnecessary. Let's face it, no matter when the interim permission regime actually opens for applications, it's highly unlikely that any licence-holders will be applying before the first few months of 2014 at the earliest. Indeed, there may well simply be a flood of applications for interim permission in March 2014. There are two reasons for this: first, no-one not currently regulated by the FCA will want to be within the purview of FCA before they have to be; secondly, the FCA will not even be producing its own proposed guidance on how to apply for interim permission before the autumn, so no-one is likely to apply until that is in circulation. Moreover, all the draft FCA Rules (see below) are yet to come, and all will need time to digest the whole picture before making applications.
So, the Government needn't rush. Having said that, one suspects the FCA, once they see that all potential applicants for interim permission are holding back, may use strong arm tactics to force some of those it already regulates in other respects to apply earlier than they would otherwise have contemplated.
As the RAO stands, even at a quick read through (which is all most of us have had time for so far) it is replete with mistakes and inaccuracies, and it's not clear how this will get sorted. After all, the finance industry is, even now, still finding new things wrong with the Regulations brought-in in a rush in 2007 relating to statements and notices of sums in arrears, some of which simply are incapable of being fixed. So, not only are we going to be faced with the most impenetrable regulatory soup (see my previous Article), but it's likely to be compounded by some of it just being plain wrong. This is good for us specialist lawyers - but for who else?
The Forthcoming FCA Rules
Notwithstanding all this rush, the other key piece in the jigsaw - or, to continue the metaphor, ingredient in the regulatory soup - is to be the promulgation by the FCA of its Rules. These now, apparently, will not be coming in draft form for consultation (and no doubt with too short a consultation period) until the autumn, so the time to get systems ready for implementation will likewise be too short in many, if not all, cases to be manageable.
The Government's and FCA's original Consultations and the Summary of Responses appear to regard this as a non-problem because they intend to make the process easier by stating that no-one will be penalised for simply complying with existing CCA rules and OFT Guidance for a six month period after the commencement date on 1 April 2014. Further, the Government now intends to give the FCA power specifically to "lift and drop" provisions from existing CCA Statutory Instruments as new FCA Rules. This will need a further Statutory Instrument in due course. This process will not be helped by the new definitions used in the RAO being different from the definitions used in the CCA - see below.
As I have previously pointed out, alas, it is not as simple as that. A provision in a Statutory Instrument has to be interpreted according to the rules of statutory interpretation and, ultimately, by the courts. An FCA Rule means what the FCA intended it to mean, even if the words are the same as those in the previous Statutory Instrument, and that Rule, furthermore, has to be interpreted against the FCA regulatory background, including their 11 principles for consumer outcomes. Moreover, what was formerly OFT Guidance, which may or may not have been followed subject to a licence-holder having a reasonable justification for not following it, now becomes a Rule and, therefore, mandatory.
The level of fees which the FCA will charge for authorisation is still up in the air. Indeed, while we know that the planned cost of interim permission will be quite reasonable (see the previous Article), they tell us that the range of fees for full authorisation will be from £1K to £250K(!). This potential range, in effect, gives us no current guidance on where it is going to be - but it looks as if it is going to be expensive. It will be linked in some way to the turnover, profitability or portfolio size of the applicant, but the FCA is still trying to work out what is the best way of doing this - in fairness, they need information from the industry on how it does its accounts to get to the bottom of this. Presumably, the fees will be cheaper for those who are perceived as being lower risk and highest for the biggest players, though that does not follow. They may, for example, be longing to slap high fees on pay-day lenders to compensate for the amount of regulatory time which will be spent with them. It is also not clear whether, if a group of companies have multiple licences, they will have to pay multiple maximum fees for the group authorisations.
The Detail of the RAO
It's beyond the scope of this note to spend time looking at problems with the drafting of the RAO. Any remaining readers will doubtless be relieved to hear that. Here are just some examples:-
- On its face, the RAO for the first time exempts all lending (but not hiring) which is wholly for the purposes of a business, even if the amount financed is under £25K, from regulation. While, at first glance, this may appear at last to be a victory for common sense, it's almost certainly a drafting error which will be "corrected" in the journey of the RAO through Parliament.
- I can find the provisions dictating how ancillary businesses (credit brokers, debt collection agencies etc) apply for interim permission but not those applicable to mainstream lenders, at least where those mainstream lenders outsource their ancillary businesses and don't do them themselves. It is quite possible that at this early stage I've missed something 'tucked away' somewhere in the RAO about this but, wherever it is, it's not up-front.
- Possibly, the main issue, though, is the new nomenclature, as referred to above. Under the RAO, a "debtor-creditor-supplier agreement" becomes a "borrower-lender-supplier agreement", notwithstanding that in many consumer credit agreements (particularly, conditional sale and hire purchase) there's no borrower and no lender. A non-consumer entitled to protection under the CCA becomes a "relevant recipient of credit" or, sometimes, a "relevant person". As noted above, the new power in the FCA to "lift and drop" CCA Statutory Instrument provisions into FCA Rules will not be assisted by the change in nomenclature. Moreover, as some parts of the CCA remain in force, a lot of time will be spent working out areas where the two sets of definitions and provisions do not interact properly before we even get to considering the terms of the Rules. Again, this will be fun for the lawyers but one wonders who else, apart from the lawyers, will benefit from all this.
Gold-plating remains the forgotten elephant in the room. The EU Consumer Credit Directive is a "maximum harmonisation" Directive, which means that member states generally may not impose stricter rules on consumer credit than those set out in the Directive (and as previously implemented in the UK in the 2010 Regulations). The interaction between the RAO and all the forthcoming FCA Rules, on the one hand, and the Directive, on the other, may give much cause for future litigation on the competence of some provisions in relation to the gold-plating restrictions.
To be more helpful - what do licence-holders need to do now?
- As noted above, the FCA will not consider that you are failing to meet their regime for a period after the commencement date if you are complying with existing legislation and OFT Guidance. It has to be assumed that licence-holders are complying with legislation; but are they complying with the Guidance? As previously mentioned, guidance is guidance whereas, in the FCA regime, it will become mandatory. So, licence-holders need to look now at the Guidance previously issued by the OFT and their processes, and incorporate into those processes anything they do not already incorporate.
- Everybody needs to start getting ready for compliance. This will take time, and systems and staff and third party training regimes will need to be established. We may not know the FCA's Rules yet but we do know their existing Principles. Those companies already regulated by the FSA, who will have an undeserved competitive advantage here, know what record-keeping is required, particularly as to complaints, dealing with them and keeping records of them, as well as all the routine information on the business which has to be provided to the Regulator. Those not already so regulated need to start now to set up the record keeping systems and evidence of main board oversight of behaviour which the FCA will require.
- Review what categories their existing CCA licence covers and that those categories are all they need. Once an interim permission is issued the categories will be frozen and it's unlikely there will be a facility to extend them until a full authorisation is forthcoming. The FCA may be unsympathetic to a request for an authorisation covering something not permitted by an existing licence and interim permission where they realise that the licence-holder's activities are not changing but they are seeking a wider scope of authorisation than they enjoyed hitherto. It's well-known that there is a bit of a shambles for ancillary credit businesses between the (D) and (E) categories of licence; so, if in doubt, sort it now.
A thought on the Impact Assessment. In my previous Article I waxed eloquent about the finance companies who would leave the market and limit their activities to non-regulated business lending - perhaps only to companies - rather than face regulation by a body such as the FCA. The revised Impact Assessment deals with this a little better than the previous draft but still minimises what I continue to view as a very real risk to the overall economy, particularly as it continues to fail to take into account that the primary area where there will be departures from the market is in point of sale finance, primarily, of course, cars and retail stores. The authors of the Impact Assessment take the view that the banks will fill the point of sale hole created, though in fact, as this is a market which the banks have recently departed from, it is highly unlikely that they will fill it. They then make the following comment:-
"Taking into account the fact that non-bank lenders constitute a small part of the total and given that banks are already regulated by the FCA, the impact of the transfer is not expected to be significant in terms of lending to business".
Leaving aside for the moment the fact that they refer only to "business" and not to "consumers", am I alone in finding this an outrageous statement? The Government appears explicitly to be happy to give the banks a competitive advantage over smaller lenders and deliberately to be encouraging the constriction of the lending market to a lesser number of providers, rather than to be defending the overall interests of a competitive market. I find this attitude Putin-esque (as in Vladimir) and completely unacceptable in a properly working democracy, but maybe that's just me.