The new Financial Conduct Authority (FCA) opened for business on 1 April 2013 and will administer a new regulatory regime for consumer credit from 1 April 2014. With that date fast approaching, there is still a great deal of uncertainty around the new regime and the transition to it. This is causing concern for consumer credit firms which, in just a few months from now, will be able to apply to the FCA for "interim permission" to continue lending.
Consultation papers published by the Government and the Financial Services Authority (FSA) last month now give us some idea of how the new regime will work. Here, as part of a series of alerts on the regulation of consumer credit we provide an overview of the proposed regime, the timetable for transition and guidance on how firms can begin to prepare. Future alerts will focus on key aspects of the new regime and keep you abreast of further developments as they occur.
A new regime - the FSA's consultation document
The Government has announced that it will transfer responsibility for regulating consumer credit from the Office of Fair Trading (OFT) to the FCA by 1 April 2014 - 12 months on from the FCA opening for business.
On 6 March 2013 (only three months later than planned) the FSA finally published its first consultation document on the future of consumer credit regulation, "High level proposals for an FCA regime for consumer credit". After a period of considerable uncertainty, this now gives us some idea as to how the FCA will carry out its new functions. At the same time, the Government published a paper including draft legislation to effect the transfer.
The FSA paper is 201 pages long, which is quite short given the task in hand. More detailed briefing notes focussing on specific areas will follow, but as an overview the key points are as follows:
Provisions of the Consumer Credit Act 1974 to be retained
The Government's eventual aim is to transfer as much of the Consumer Credit Act 1974 (CCA) as possible, together with the relevant OFT guidance, into a new rulebook. This has the potential to change the status of OFT guidance, such as guidance for credit brokers and intermediaries and on irresponsible lending, from mere guidance to actual rules.
Most have been relieved to hear that there will not be a wholesale repeal and/or transfer of the provisions of the CCA in the foreseeable future.
It is still envisaged (possibly unrealistically) that there will be a new rulebook in place by April 2014, although very few provisions of the CCA will be moved to the rulebook at this early stage. It has been recognised that a great deal more work will be required to identify which provisions should be transferred over, and how this will be achieved.
So for the time being at least, much more of the CCA is being retained after April 2014 than was perhaps envisaged. In particular, the detailed and prescriptive requirements of the CCA as to the lending process (i.e. the supply of pre-contract information, signing of agreements, form and content of agreements and cancellation rights) and provisions regulating the default, termination and enforcement of CCA-regulated agreements will remain largely intact on the statute book and continue in substantially their present form.
This is likely to come as a relief to many lenders, given the industry preference for retention of the detailed requirements of the CCA and the fact that substantial amendment to standard form documentation for regulated loans, hire and hire purchase is unlikely to be required; at least for the foreseeable future. Clearly, however, there will be a need for at least some initial amendment to documents such as agreements, default notices and notices of sums in arrears where there are references to the OFT.
All correspondence with customers, pre-contract information and agreements issued after 1 April 2014 will need to make it clear that firms are regulated by the FCA. In addition, this will need to confirm whether they have interim permission, limited permission or full authorisation (which may in fact mean that more than one round of amendments is required as firms move to interim permission, and then to full authorisation).
As to the longer term, we do not yet know what will ultimately happen to key secondary legislation such as the Agreements and Disclosure of Information Regulations, among others. So, to some extent, it remains a case of "watch this space".
Provisions of the CCA to be repealed
Only about 30 sections out of nearly 200 are to be repealed by April 2014, which will include as many of the CCA's criminal sanctions as possible. The idea is that the FCA will have a much more extensive "disciplinary toolkit" than the OFT, and will therefore be able to deal more effectively with enforcement.
CCA requirements in relation to advertising will be repealed altogether, and consumer credit advertising will be absorbed into the current (more stringent) Financial Services and Markets Act 2000 financial promotions regime. It is not currently clear exactly how the new rules on advertising will operate, given they are not even being consulted on until this autumn. This may mean that firms will be left with little time to get to grips with the new rules and ensure compliance.
The Consumer Credit Directive requirements to provide Adequate Explanations and assess creditworthiness (s 55A and 55B of the CCA) are also to be repealed and replaced.
This is, however, likely to be the tip of the iceberg. Other elements of the CCA will then be reviewed over a five-year period with a view to their repeal once the FCA has properly considered how much can feasibly be incorporated into the new rulebook.
New authorisation process
There will be a new authorisation process for firms conducting regulated consumer credit business, although full authorisation will only be required from 1 April 2016. Firms carrying out consumer credit business will need to meet certain "threshold conditions" in relation to matters such as legal status, suitability and business model in order to obtain authorisation. The FCA will also apply a modified version of the FSA's Approved Persons regime, ensuring key individuals within firms are "fit and proper" in terms of honesty and integrity, competence and financial soundness.
Firms perceived to be lower risk (such as high street retailers and motor dealers, for whom credit is secondary to their main business) will also have access to light touch direct authorisation, or "limited permission", instead of needing full authorisation.
A firm will be able to exempt itself from the authorisation process by becoming an appointed representative of an authorised firm - i.e. the authorised firm will accept responsibility for the appointed representative carrying on regulated activities, and the appointed representative will itself have no direct relationship with the FCA. This will be of particular pertinence to lenders who rely on franchised dealers or intermediaries to find or deal with customers on their behalf. This approach will involve the lender acting as principal to, and monitoring the quality of, service provided by the dealer or intermediary.
Requirements and compliance burdens for authorised firms will be differentiated depending on a firm's risk profile. The new regime will be designed to focus on higher risk firms, such as payday lenders, pawnbrokers and debt collectors. The idea is that there will be significantly lower regulatory burdens (including reduced reporting requirements and lower fees) for the credit market than for other FCA-regulated firms. Some standard FSA requirements which are inappropriate for the credit market, such as capital adequacy requirements and subscription to the Financial Services Compensation Scheme, will not apply to lenders.
No significant reform is planned, initially at least, in respect of conduct rules. These will be based on the standards currently required of firms and complemented by the FCA's Principles for Businesses, including the requirement to treat customers fairly (TCF). By 2019, the FCA will review retained CCA conduct requirements and develop rules-based alternatives as far as possible.
The consultation period for the paper is very short, ending on 1 May 2013. Lenders are encouraged to send any comments to the FCA by this date. This can be done via the Finance and Leasing Association, for those firms which are members.
The Government will then publish final draft secondary legislation in the form of a Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013 and a Financial Services Act 2012 (Consumer Credit) Order 2013. Parliamentary approval for both will be sought in the summer of next year.
A more detailed FCA consultation on the new rulebook is then expected during the autumn. We will report to you on that in due course.
The FCA will publish near final high-level rules in March 2014, in time for the April 2014 transfer. There will then be an "interim regime" between April 2014 and April 2016. From the end of this year, firms with consumer credit licences will be able to register to carry on lending and interim permissions will be granted following payment of a £350 fee, subject to minimum information requirements (more or less as of right).
There will also be a grace period (six months has been suggested, although this seems unrealistically short) during which firms will not need to comply with the new rulebook so long as they continue to comply with current standards as set out in the CCA or OFT guidance.
The FCA is then expected to start considering applications for full authorisation in autumn/winter 2014, with a view to completing the authorisation process by spring/summer 2016. The FCA may require different classes of interim permission holders to apply at different times and will probably prioritise applications according to risk profile.
In effect, this means the "interim regime" will be much shorter than two years for some firms, which will immediately launch into the full authorisation process (expected to take anything from six to twelve months). It is likely that applications will need to be accompanied by business plans.
The consultation paper shows that, despite the early April 2014 transfer date, significant regime change is likely to come at a slower pace than had perhaps been anticipated. There does, however, seem to be an intention to properly tailor the new regime to the credit market and recognition that this will take time. Lenders should find this of some reassurance.
It is clear that much of the CCA will remain in place following April 2014, at least for the next few years. Even where there is a transfer to the new rulebook, the idea is that the replacement rules will be closely based on the existing regime. This means that firms complying with current CCA and OFT requirements should, for the most part, be compliant with FCA requirements after transfer. It is also recognised that firms will require a period of adjustment which will be allowed for.
Despite these concessions, however, the current timetable remains unrealistic in that it is driven by the hard and fast April 2014 deadline. This simply does not allow any reasonable period of time for consultation and parliamentary consideration of the regulations which will underpin the new regime.