On 3 October 2013, the Financial Conduct Authority (the FCA) published its consultation paper on the detailed proposals for the FCA’s consumer credit regime1 (CP13/10).
The consultation paper will be of interest to all firms currently providing consumer credit and related services in the UK, including peer to peer lenders, credit card providers, loan companies and debt collection agencies. CP13/10 builds on the earlier consultation published by the FCA’s predecessor, the Financial Services Authority, in March 2013.
The FCA’s Consumer Credit Sourcebook (CONC)
The FCA has provided its proposals for the conduct of business standards it will apply to consumer credit firms. These standards will be set out in a new consumer credit sourcebook, known as CONC, in the FCA’s Handbook. It is expected that the FCA will be more proactive than the current regulator, the Office of Fair Trading (the OFT) and this is reflected in a set of conduct of business rules and guidance which enhance the existing consumer credit framework.
The current consumer credit regime is set out in the Consumer Credit Act 1974 (the CCA) and secondary legislation, as well as in guidance published by the OFT. The FCA will be carrying across many of these standards into its own rules and guidance, with the intention that to do so will help to protect consumers but reduce the burden of transitioning firms to the FCA’s regulatory regime.
CONC will follow the same broad structure as existing conduct of business sourcebooks in the FCA Handbook, such as the Conduct of Business Sourcebook (COBS) and the Banking Conduct of Business Sourcebook (BCOB). The FCA has proposed that CONC will be divided up into subject areas including:
- financial promotions;
- pre-contractual disclosure;
- responsible lending; and
- arrears, default and recovery (including repossessions).
Each area of CONC will set out the FCA’s rules, most of which will be derived from existing conduct-related provisions in the CCA and secondary legislation. The FCA does not propose to substantially change the relevant CCA provisions, although it does propose extending standards on pre-contractual explanations and creditworthiness to peer to peer lenders.
In March, the FCA consulted on the principle of turning OFT guidance into FCA rules and guidance. By doing so, the FCA anticipated that consumer credit firms would be unlikely to need to change their behaviour as they would already be required to comply with such guidance, if relevant.
The FCA has now proposed making certain pieces of OFT guidance into FCA rules, where it is appropriate and necessary, including the OFT’s guidance on debt collection and irresponsible lending.
In other cases, the FCA will include its own guidance to the rules in CONC indicating, for example, when a particular behaviour is likely to be breach of the FCA’s Principles for Business (PRIN).
Existing rules relating to credit advertisements in the Consumer Credit (Advertising) Regulations 2004 and 2010 have been revoked and replaced with new rules for financial promotions for credit which reflect the FCA’s existing standards.
In particular, the FCA proposes to require firms to comply with the high level principle that a communication or financial promotion is clear, fair and not misleading. The FCA anticipates that, as firms will be required to comply with PRIN and the Consumer Protection from Unfair Trading Regulations, this should not impose a further burden. However, the FCA has been active in the area of financial promotions and consumer credit firms unused to the FCA’s reach should review their promotional material in advance of the transfer.
The current consumer credit regime is supported by a wider variety of industry codes, including codes issued by the Lending Standards Board, the Cards Association and other trade associations. The FCA does not propose adopting every existing industry code, but will consider this on a case-by-case basis and incorporate industry codes where it is appropriate to the FCA’s supervision and enforcement processes and to ensure consumer protection.
The new rules will come into force on 1 April 2014.
The FCA does not anticipate that firms will need to make significant changes to their systems to comply with the rules and so proposes including a 6 month transitional period from 1 April 2014, during which the FCA will not take enforcement action based on the new rules, as long as the firm in question can demonstrate that it is compliant with the corresponding CCA requirement or OFT guidance.
What should firms be doing now?
This consultation paper demonstrates the importance of consumer protection in the FCA’s regulatory regime. Historically, existing CCA rules and OFT guidance have been interpreted in a flexible way by some consumer credit firms and it will be vital for firms to review their systems and controls well in advance of the transfer of regulation to help to ensure that its business avoids the scrutiny of the FCA’s supervision and enforcement processes.