The Financial Conduct Authority (FCA) will take over the regulation of consumer credit on 1 April 2014. The transfer of the regime marks a significant step as, for the first time, all retail financial services will be within the remit of one regulator. Consumer credit firms have been warned by Martin Wheatley, the Chief Executive of the FCA, to expect a change in approach:
"Our new rules will help us to protect consumers and give us strong new powers to tackle any firm found to be overstepping the line."
"Our supervision of firms will be hands on and we will closely monitor how providers treat their customers, in particular those operating in higher risk sectors such as credit cards, debt management and payday. We will respond quickly to any issues that are identified and there will be swift penalties for any firm or individual found not to be putting consumers' interests first, including possible enforcement action and consumer redress."
Consumer credit firms will have to acclimatise very quickly to the structure of the Financial Services and Markets Act 2000 (the "FSMA") and all that comes with it, including the Principles for Businesses and the Threshold Conditions.
The Statutory Framework
Although the FSMA forms the basis of the statutory framework through which the FCA will regulate consumer credit, April 2014 does not mark the end of the Consumer Credit Act 1974 (the "CCA"). When the government proposed the transfer of the regime, it assured consumer protection bodies that the same level of consumer protection would be maintained. Due to the nature of the remedies available to consumers where provisions of the CCA are breached, this has meant that much of the CCA has had to be retained, including secondary legislation which contains the detailed provisions for pre-contract information, credit agreements, post-contract information and action following borrower default. This has left a hybrid regime with two pieces of primary legislation, a multitude of secondary legislation under both, and the FCA Handbook. The much broader range of enforcement action open to the FCA will sit alongside the existing consumer remedies under the CCA.
Principles for businesses
The application of the Principles for Businesses from 1 April 2014 will be viewed with some concern by firms. The FCA has stated that it expects well run firms will not have any issues. However, the old "fitness" test applied by the OFT when monitoring consumer credit licences was operated on a very "reactive" basis. Although the OFT has been a more proactive enforcer recently, as can be seen through its reviews of the debt collection and payday lending sectors, it has never had the powers or resources to supervise firms in the same way as the FCA. The FCA is committed to being a proactive regulator dealing swiftly with firms when it identifies consumer detriment and also anticipating potential detriment. With the high level principles putting the interests of the consumer at the heart of policy making, firms should expect to see an active regulator.
It is important to note that 1 April 2014 marks the first step in an on-going process of raising standards in the industry. From 1 April firms will be operating under interim permissions which will need to be converted to full permissions by April 2016. Firms that are not currently authorised under FSMA are likely to find the authorisation process challenging. This is an area where the Threshold Conditions, which form the gateway to the FSMA authorisation, are both more stringent than the existing fitness test for a CCA licence and, perhaps more importantly, are tested in a much more robust way when the firm's application for authorisation is being reviewed. The resources of a firm (both financial and non-financial), its business model and its people will be the subject of higher levels of scrutiny. There is no equivalent of the Approved Persons regime in the CCA. For some firms, identifying individuals who will satisfy the standards expected of approved persons in senior management roles may be challenging. Equally those within existing CCA firms may be hesitant about moving into a regime where personal responsibility and liability are viewed as significant enforcement tools by the regulator. Business models may also need to be adapted. Lending is by its nature a very different activity to the other products directly regulated by the FCA. How do you measure whether a credit product has a good customer outcome? It is already clear through the focus on the payday lending sector that the link between the cost of credit and the heightened risk of a borrower failing to repay due to a poor credit history is unlikely to be viewed as a straightforward bargain by the FCA.
On 28 February 2014, the FCA published "made rules" which amend various parts of the FCA's Handbook, with the most significant being the addition of the new Consumer Credit sourcebook or "CONC". The initial proposals for CONC (published in October 2013) were met with concern and were followed by intensive lobbying by the consumer credit industry. Their concerns arose mostly because CONC translates OFT guidance on the CCA into FCA rules and FCA guidance. To date, firms have been able to comply with the CCA without following the OFT guidance to the letter since the ultimate arbiter of compliance is the court, not the OFT – which the OFT always made clear when issuing guidance at an industry or individual level. In contrast, in the future, the FCA will be the sole arbiter of compliance and firms will have a very limited ability to challenge the position it takes on its rules and guidance.
The problems for firms fall within four broad categories:
- extending scope (applying rules to a wider range of agreements);
- hardening position (making things mandatory rather than 'to be considered');
- removing discretion (depriving lenders of the ability to apply their own judgment on issues); and
- gold plating (going beyond the maximum harmonisation provisions of the Consumer Credit Directive).
The FCA has rejected accusations of gold plating, especially in relation to the new requirements for assessing creditworthiness, but has responded to some of the concerns expressed by the industry by re-classifying some rules as guidance and including a stronger emphasis on proportionality. However, firms will still need to be looking carefully at their current processes to ensure they comply with CONC. There is a danger that what a firm considers to be proportionate will not match the expectations of the FCA.
It is possible that the regime will be simplified in the future. The FCA has the task of reviewing the retained provisions of the CCA. This will be a significant task and again is likely to be the subject of scrutiny by the different interest groups in the sector. Whilst the FCA may be confident in its range of enforcement tools, convincing consumer organisations that it can maintain consumer protection levels without, for example, criminal sanctions, is likely to be difficult.
The FCA will also be publishing its consultation on interest caps in the summer. It is under a duty to impose a cap for the high-cost-short-term credit market – and this is likely to be the subject of considerable attention from the media and politicians alike. Many doubt the effectiveness of interest rate caps in raising consumer protection standards but it would seem that in the current political climate, with a General Election scheduled for May 2015, the FCA will be under political pressure to set a cap which will be seen to address the perceived excesses of the payday lending sector.
The first few years of FCA regulation are also likely to be marked by a number of thematic reviews as the FCA seeks to address areas where the OFT may previously have identified issues but felt powerless to take action. Change is likely for the foreseeable future.