The government has taken the decision that, in principle, responsibility for the regulation of consumer credit and second charge mortgages should be transferred from the Office Fair Trading into the same regulatory regime as other retail financial services under the Financial Conduct Authority (FCA).
The FCA will focus on firms' "conduct of business" with their customers. Its primary objectives will include ensuring well-functioning financial markets and securing an appropriate degree of protection for consumers.
In taking over the Financial Services Authority's (FSA) current role, it is expected that the FCA will be a tougher, more proactive and more focused regulator with a very different approach to that of the OFT.
The government's view is that the creation of the FCA presents an ideal opportunity to consider a "systematic overhaul" of the current consumer credit regime.
The consumer credit regime is currently governed on a statutory basis under the Consumer Credit Act 1974. It is expected that the 74 Act will be replaced entirely with a rules-based approach like that set out in the Financial Services and Markets Act 2000 (FSMA).
This analysis examines the core elements of what such a regime might look like and sets out an anticipated time-line for a transfer.
Core elements of FCA regulation
It is likely that certain core elements of the current FSMA regime will be applied by the FCA. Firms currently registered with the OFT should take steps to familiarise themselves with these concepts.
- Authorisation requirements
It is proposed that the FCA's remit will be extended to include the regulation of the following activities:
- "Loans and other forms of credit" and this is defined as: "Rights under any contract under which one person provides another with credit" (which includes any cash loan or other financial accommodation) and
- "Contracts for hire of goods", defined as "rights under a contract for [the hire] of goods to a person other than a body corporate".
The definition will also include what are currently termed "second mortgages."
As a consequence, firms wishing to carry on their business involving these activities will need to apply to the FCA for permission in due course.
Firms making an application should be prepared to provide extensive supporting materials, including a business plan, compliance procedures, balance sheets and cash flow forecasts.
The FCA will be funded entirely by the firms it regulates and, therefore, the FCA would assume responsibility for setting fee structures for consumer credit firms.
- Threshold conditions
These are the minimum standards set out in FSMA that firms must meet in order to be able to carry on regulated activities. Before giving permission, the FCA will ask for comprehensive information and will require the firm to meet certain standards in relation to matters such as:
- the legal status of the firm (i.e. its corporate structure)
- the fact that a UK registered company or partnership must have its head office in the UK, in addition to its registered office
- close links. That is the firm's parent company, subsidiaries, owners and controllers. The FCA will want to establish that the nature and identity of the firm's controllers are such that it will be able to supervise the firm sufficiently. It will therefore need to understand the ownership structure of the firm including any foreign parent company
- adequate resources, both financial and human
- suitability. This concept covers the fitness and propriety of the owners, directors and senior managers of the firm and the need to ensure that the firm's affairs are conducted soundly and prudently.
- Approved persons
Individuals performing roles of particular regulatory significance (such as directors and compliance officers) will need individual approval from the FCA to carry out that role. In recent times, the regulatory responsibilities of approved persons have become increasingly onerous.
- Systems and controls
These requirements are currently set out in the FSA Handbook in a chapter known as 'SYSC.' This sets out the responsibilities of directors and senior management and the general organisational matters in respect of the firm. It covers compliance and audit, outsourcing, and, most importantly, the management of risk.
- The principles for businesses
These are the fundamental obligations of all firms under the regulatory system. There are 11 principles covering matters from acting with integrity to financial prudence, from customers' interests to conflicts of interest. Although the principles do not constitute rules, they are binding and the FSA has repeatedly relied upon breaches of principles in its enforcement actions.
- Conduct of business rules
These cover the firm's business dealings with its customers, including financial promotions offering products and services, how firms sell to and deal with their customers.
- Prudential rules
These include solvency and minimum capital requirements as well as rules relating to corporate governance.
- Regular reporting requirements
- Supervision and enforcement rules and procedures
The FCA will have the power to fine firms and individuals. It will have the power to prohibit individuals from carrying out certain roles in regulated entities. It will have the power to intervene if it considers any products or practices to be detrimental to consumers.