From April 2014, the Financial Conduct Authority (FCA) will take over regulating consumer credit firms, currently regulated by the Office of Fair Trading (the OFT).
Boards, compliance teams and risk departments should all start preparing for the forthcoming changes to consumer credit regulation.
The transfer of regulation from the OFT to the FCA will affect firms both small and large, from payday lenders and pawnbrokers to banks and insurance firms offering credit. Our experience in the consumer credit industry indicates that a number of existing business models employ a flexible interpretation of some of the OFT’s guidance and the primary legislation. It is unlikely that the FCA will entertain such ‘flexibility’ from next April. This tougher approach will begin almost instantly, with the current proposal to transform OFT guidance into FCA rules in April 2014. Your business should prepare itself for a major shift in regulatory focus in the area of consumer credit and make sure that all departments affected are aware of the changes.
- Board members are ultimately responsible for the actions of the firm and should be fully briefed on the changes to regulation and the impact of this on the business. As a Board member, you may also be an approved person (perhaps for the first time) and if this is the case, you should be aware of your new obligations under the FCA’s Approved Persons Code of Conduct and the risk of personal liability should things go wrong.
- Has the Board considered whether it is properly resourced for the forthcoming changes? There will be increased costs to compliance and/or risk and the FCA will expect consumer credit firms to be properly resourced and able to demonstrate sufficient expertise in the area.
- The FCA has indicated that non-EEA firms offering consumer credit into the UK will need to have a UK establishment before it can be fully authorised in April 2016 – this shift in operations to the UK could have a significant impact on your firm’s business model.
- Compliance teams should consider their existing arrangements for complying with consumer credit legislation, in particular the waves of secondary regulations on areas such as credit advertising, statutory notices and credit agreements. Many of these regulations have evolved in line with the development of the Consumer Credit Act and it is easy to miss some of the more minor changes.
- A compliance team should also make sure that it understands the consequences of non-compliance in this area, as failing to comply with prescriptive requirements can mean that agreements are unenforceable or that interest cannot be charged on a debt.
- Consider implementing a ‘refresher’ training programme for existing compliance staff, so that they are well prepared for questions from elsewhere in the business.
- Also consider how your business will streamline its consumer credit and other FCA regulated business, if relevant. Often, consumer credit is dealt with specialist personnel in a compliance team (often as a result of the complex and unique rules of the existing regime), but it may now make sense to appoint a specific person to ensure that the tone and language put to the FCA on consumer credit and other FCA-regulated issues is consistent.
- Reflect on how your business will deal with consumer credit issues which may now become ‘reportable’ under the FCA’s Principle 11 (dealing with the regulator in an open and cooperative manner) or, where you have breached a specific FCA rule, under SUP 15.3 of the FCA Handbook. Remember that an FCA regulated firm has a duty to inform the FCA when it has knowingly breached an FCA rule and this may lead to further scrutiny (including themed visits or enforcement action) from the regulator.
- Risk teams should undertake a risk mapping exercise well in advance of the April 2014 cutover date. The FCA requires firms to validate the information contained on the OFT register, so check that each business line is properly licensed (including all sub-categories of licence which is required) and that all contact details are up to date on the OFT register. Together with the compliance team, also check that all ‘controllers’ (those holding 33% or more of the control) have been notified to the OFT.
- Consider whether the increased regulatory risk in the shift to the FCA means that a consolidation of licensed businesses into one streamlined business unit may be beneficial. Where your firm is part of a wider group of licensed firms, consider establishing a licensed ‘principal’ and appointed representative structure. Remember that only certain activities can benefit from the appointed representative structure.
- Developing new products for consumers will need to be carefully managed, in line with the FCA’s increased focus on products. Firms can learn lessons from the misselling scandals around PPI and the regulatory pressure on payday lenders. Establish a clear product governance process, including stress testing and research into whether a product can offer value for money for your consumers.
- How will your firm adapt to the change in regulatory risk? Consider whether Board briefing packs or a standing item on the Board agenda is required, depending on the impact of the shift to the FCA on your risk categorisation.