With consumer credit regulation now firmly in the Financial Conduct Authority’s hands, all affected firms should be checking whether they have met the deadlines imposed so far. If not, they have urgent decisions to make. If so, they must prepare for the next stage: the full authorisation application. Emma Radmore outlines what firms should have done already and the next steps.

Did you register for interim permission?

All firms that held an Office of Fair Trading (OFT) licence for consumer credit and related activities that previously fell under the Consumer Credit Act 1974 (CCA) needed to ensure they held interim permission from the FCA to carry on those activities from 1 April 2014. This entailed:

  • checking the scope of their OFT licence;
  • checking whether they were part of a group licence; and
  • assessing the credit-related regulated activities within the Financial Services and Markets Act 2000 (FSMA)(Regulated Activities) Order 2001 as amended (RAO).

It was important to make these checks carefully because:

  • the group licence would no longer exist, and firms may have had to restructure their operations to ensure only entities holding valid licences carried on business from 1 April;
  • the scope of the credit-related activities in the RAO is not absolutely identical to that in the CCA: some activities that needed a CCA licence would not require FCA authorisation, while other activities have been introduced by the RAO as new regulated activities; and
  • it was therefore important to ensure the right notifications were made to the FCA.

Firms that were not previously authorised under FSMA needed to apply for a full interim permission. Firms that were already authorised for activities that fell under FSMA had to apply for an interim variation of permission.

Did you check your service providers registered for interim permission?

Many consumer credit firms will have relied on third party processors, distributors and other outsourced service providers to carry out significant functions – particularly back office functions. Many of these providers would themselves have needed an OFT licence and should therefore have notified the FCA of their need for an interim permission.

Firms that wish to put in place appointed representative arrangements for consumer credit related activities will in principle be able to do so, but

  • must have appropriate permissions to act as principal;
  • must ensure the activities for which they wish to appoint representatives fall within the scope of the appointed representative regime; and
  • in any event, cannot act as principal while only interim authorised – they must wait to get their full permissions.

What if you did not get interim permission?

The FCA has published lists of firms with interim permissions, and lists of firms that were OFT licensed but which did not register for interim permission.

Any firm that did not properly register for interim permission, or interim variation of permission, or whose application had not been determined by the OFT as at 1 April could not carry on any credit-related activities until authorised by the FCA. This could lead to significant issues, given that the regulator is not obliged to determine even complete applications within a lesser time period than six months. Although it would try to do so, its resourcing problems are such that no firm should expect a speedy outcome.

The consequences of carrying on unlicensed business are severe. A firm that carries on unlicensed credit-related activities commits a criminal offence, and agreements it enters into in the course of unlicensed business are unenforceable by it. It is likely that any contravention would impact on a subsequent assessment by the FCA in the course of an authorisation application of the fitness and properness of the firm to be an authorised person.

Any firm that is not properly authorised would need to cease its business pending authorisation. This is a significant issue not only for the firms in question, but also for any other firm that relies on service providers – as the principal firm will be unable to use unauthorised providers until they become authorised.

There is perhaps some small light at the end of the tunnel for firms that for whatever reason have failed to get their interim permission. Seeing as the changeover of regulation is a result of legislation, the FCA does not have the power unilaterally to allow firms to carry on credit related activities without authorisation, nor to allow them to apply late for interim permissions. However, Treasury has now made legislation that allows local authorities to apply late for interim permissions and, as a result, the FCA plans to amend its rules also to cater for this. Whether this sets a precedent so that Treasury might widen the scope of this concession remains to be seen. As it stands, firms that are not authorised and are continuing to carry on regulated activities should urgently seek legal advice, as they need to consider their position as well as what reports they may need to make, to which regulators and enforcement agencies, as a result of their continuing activities.

What happens next?

Assuming firms have their interim permissions in place, FCA rules relating to consumer credit applied from 1 April – mainly, but not only, the Consumer Credit Sourcebook (CONC). However, a number of the rules will not apply until firms are fully authorised, although they can choose to comply with them earlier. For firms that were compliant with the OFT regime, compliance with CONC should be fairly straightforward, as many of the rules are taken from OFT guidance.

The next step for many firms is completion of the full application form. While firms needing authorisation could apply from 1 April (and firms whose applications were with the OFT before 1 April have had their applications transferred to the FCA), each firm with an interim permission should by now have received a letter from the FCA telling it when its ‘landing slot’ is. This is the period within which the FCA will consider firms’ applications for permission or variation of permission. Firms cannot apply before their slot without the FCA’s agreement (and firms that urgently needed authorisation – for example because they wish to act as principal on credit-related activities and engage appointed representatives – should have discussed this with the FCA some time ago), while firms that miss their landing slots will lose their interim permissions. The FCA has set the landing slots depending on the nature of a firm’s business, so it will assess the higher risk applications fi rst, and leave the low risk, limited permission applications until the end. The slots will run from 1 October 2014 to 31 March 2016. It has confirmed that high-cost short-term credit lenders, logbook lenders and debt management firms will be the first firms it requires to apply. The FCA has issued a detailed direction to firms explaining what they must do and listing the slots for each type of business, divided by business and region.

The application form

The FCA requires a full application; the OFT forms were nowhere near as detailed as the FCA’s, so it wants to assess all applications against its standards.

The application contains several forms, all of which appear on the landing page of its online application system, but some of which I believe will not unlock until others are completed. It has also produced a guidance note to help firms understand what is required. In principle, the forms cover similar ground to traditional FCA application forms (and this is explained more fully in the guidance notes):

  • basic information on the new application
  • contact details for the application and timings
  • firm details
  • permissions and fees
  • consumer credit supplement: this is the form that will need to attach the firm’s regulatory business plan, which will be the most important part of the entire application and also should confirm whether all other parts of the form have been completed correctly. The guidance notes emphasise the stress the FCA will put on the form.
  • disclosure of significant events
  • systems and controls
  • compliance arrangements: the compliance monitoring programme must be attached to the application and the compliance procedures as a whole should be available for inspection. The guidance notes give some examples of what the FCA would expect a compliance monitoring programme to cover and applicants should check their existing programmes against the regulator’s rules to ensure they cover everything relevant.
  • personnel information
  • owners and influencers: again, the FCA gives significant guidance here. It needs to understand who controls or has close links to the applicant firm to ensure there are no hurdles to effective regulation.
  • supporting documents and other information.

Firms will also need, separately, to complete Approved Persons forms. Twelve of the FCA’s controlled functions potentially apply to consumer credit firms, but firms must assess which functions are relevant to them. For example, few functions apply to firms with limited permissions.

Ongoing compliance

The FCA has an uphill task to process all the applications it will receive and effectively police the consumer credit community. However, it is committed to doing so. Once firms are fully authorised, the regulator will assign them to the appropriate supervision category, with high risk firms having dedicated supervisors and close attention. It has already made it clear that it will focus on areas of consumer credit activity with the greatest risks of consumer detriment and is carrying out studies in some areas as well as contacting firms about whom it has concerns. Senior management at consumer credit firms must ensure they are resourced and informed about compliance generally with FCA rules, and keep up to date with FCA speeches, newsletters and initiatives. The FCA’s predecessor was a firmer, more intrusive regulator than the OFT, and the FCA, with its relatively newly-acquired more interventionist enforcement powers, will be keen to prove it can identify and stamp out behaviour that may lead to consumer harm.

This article first appeared in the July/August 2014 edition of Compliance Monitor. Written by Emma Radmore in Dentons' London office.