Introduction

On 28 February 2014, the FCA published Policy Statement 14/3: Final rules for consumer credit firms (the PS). In the PS the FCA set out its final Handbook rules for consumer credit firms. In this briefing we discuss the final rules and how they differ from the proposals that the FCA consulted on. We also take a brief look at thematic work the FCA is planning for the consumer credit industry.

Authorisation

Interim permission regime (Proposal maintained, but clarified in the PS)

The FCA has maintained the interim permission regime. During interim permission, the FCA has clarified that all firms need to comply with all aspects of the new regime that are applicable to it (including, for example, the new rules in the Consumer Credit sourcebook (CONC), the regulatory disclosure requirements in the General Provisions (GEN), the recordkeeping requirements in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC), the relevant provisions of Senior Management Arrangements, the Principles of Businesses (PRIN) – including Treating Customers Fairly). However, where a rule has been carried across from the OFT regime into the FCA Handbook in the exact same form (for example, in CONC), the FCA will not take enforcement action against firms for a breach of a rule where that firm can demonstrate that it is complying with the rule in accordance with OFT guidance. This grace period of enforcement will end on 1 October 2014.

The FCA has confirmed that if firms did not obtain an interim permission in time, they need to cease carrying on the regulated consumer credit activities until they have applied for, and received, full authorisation. We are aware that the FCA has been writing to firms who’s OFT licences have lapsed (where they do not have interim permission) informing them of this.

The interim permission regime only covers the regulated consumer credit activities in the firm’s interim permission. If a firm, even with interim permission, wishes to undertake additional regulated consumer credit activities (which are not covered by its interim permission) it cannot do so until it has obtained full authorisation. Certain changes can be made to the interim permission, including changing the firm’s contact person, the firm’s address, etc., but the listed regulated activities cannot change.

Apply for full authorisation/variation of permission (Proposal maintained, but clarified in the PS)

The FCA has maintained the transitional period for all firms to be authorised from 1 April 2014 to 1 April 2016. The FCA will require firms operating in different sectors and different regions to apply for full authorisation (or a variation of permission) within specific application periods. These application periods will run for three months only. During the correct three month window, firms with interim permission must have applied for full authorisation. Unless a firm has been granted an extension, if they have not applied for full authorisation within the three month window, their interim permission will lapse and if they wish to conduct consumer credit activities, they will need to apply for full authorisation (or a variation of permission).

The FCA issued a direction on 28 March 2014 setting out the various time periods that apply to firms with interim permission for various activities.

The first official application period starts on 1 October 2014 and the final application period ends on 31 March 2016. As appointed representatives cannot act as an appointed representative until the principal is fully authorised, firms wishing to act as ‘principals’ have been given an earlier application period - they can apply from 1 June 2014.

For groups that have multiple firms with interim permission (who may all be subject to different application periods), they can apply to the FCA for a direction to consolidate the application periods so that only one period will apply.

Full and limited permission (Proposal amended in the PS)

The FCA has maintained its limited authorisation regime. Although the FCA consulted on alternative names for this regime, it would appear that there were no suitable alternatives and so the name of the regime has remained.

In the PS the FCA has increased the list of lower risk activities that qualify for limited permission. The categories are now as follows:

Click here to view table.

The FCA has also confirmed that a firm can have limited permission (for certain regulated consumer credit activities) and also be an appointed representative for other regulated non-consumer credit activities. For example, a firm can have limited permission for credit broking (where it is ancillary to its main business) and be an appointed representative for its insurance mediation activities. This represents a unique change to the regulator’s approach to authorisation where being an appointed representative was always viewed as an alternative to authorisation.

Appointed representatives and self-employed agents (Proposal maintained but amended)

The FCA has extended the multi-principal option (where an appointed representative can act for more than one principal) to appointed representatives of third party debt collectors. The FCA has confirmed that a firm cannot be an appointed representative for a principal that is:

  • a lender who applies interest and other charges; or
  • a credit reference agency.

Also, the regime for self-employed agents has been extended so a self-employed agent can be an agent in relation to any credit activities that meet the FCA requirements (previously the credit activities for which a self-employed agent could act, were restricted).

Approved persons (Proposal maintained)

The FCA made no changes to the proposals on which they consulted which means that they are maintaining this regime for consumer credit firms once they are fully authorised (or have limited permission). As the final proposals are now settled, the approved person regime applies as follows:

Click here to view table.

In small firms, a single person can have responsibility for a number of controlled functions - for example, director and money laundering reporting officer.

If people are currently approved for significant influence functions (SIFs), or have been within the last 6 months and there are no new disclosures to make, an abbreviated application form for an approved person can be submitted.

Client money

The FCA has maintained in the PS its requirements for debt management firms and large not-for-profit debt advice bodies to have restrictions when holding client money. A new chapter 11 in the Client Assets Sourcebook (CASS) has been implemented especially for these firms (with certain rules to follow – e.g. the form of the acknowledgement letter). In addition, the FCA has clarified the rule requiring large debt management firms to consider the risks of holding all client money with one bank.

The FCA has also clarified that appointed representatives acting for debt management firms will not be able to hold client money. The reason for this is that the principal firm is likely to have difficulty in ensuring appropriate protections.

Relevant firms will not need to comply with the FCA client money requirements in CASS while they have interim permission provided those firms are acting in accordance with relevant OFT guidance on client money. However, for not-for-profit debt advice bodies who will take up limited permission, their transitional period for complying with the detailed client money rules expires on 1 October 2014.

The FCA has recently consulted on changing its client assets and client money regime for all applicable firms (which are predominantly investment firms) so the final requirements that may apply to debt management firms may change once the FCA’s policy statement (with final rules) on client assets more generally is published.

Conduct standards

High level standards (Proposal maintained in PS)

From 1 April 2014, all consumer credit firms must comply with the FCA’s high level conduct standards, such as those in PRIN and GEN. This includes the status disclosure set out in GEN, which firms must use from 1 April 2014. However, a consumer credit firm will not be required to indicate whether it has interim or limited permission, as the FCA accepts that this is unnecessary and could confuse consumers.

CONC (Some aspects of the proposal amended in PS, others maintained)

The PS sets out final rules for the conduct of business standards it will apply to consumer credit firms in CONC, many of which are unchanged from the draft rules set out in the earlier FCA consultation. As proposed in the consultation, the FCA has carried out across certain rules in the Consumer Credit Act 1974 (as amended) (the CCA) and secondary legislation, as well as guidance published by the OFT into FCA rules and guidance in CONC.

A number of firms commented that some aspects of the draft rules in CONC went beyond the OFT guidance and should align more closely to the wording in OFT guidance. The FCA accepted a number of provisions in CONC went beyond or differed from the equivalent OFT guidance. As a result, the final rules in CONC have been amended so that some specific OFT guidance is carried across as FCA guidance rather than FCA rules and other drafting changes have been made to reflect the OFT’s wording more closely or to provide further clarity.

In addition, the FCA has introduced new guidance that debt management firms should not allocate more than half of the money received from customers in debt management plans to meeting their own fees and charges. In particular, the FCA would normally expect no more than half of any payment from a customer from the first month of a debt management plan to be allocated to the firm’s fees and charges and for that proportion to decrease after 6 months or, if earlier, once the initial set up costs for the firm have been recovered.

Financial promotions (Some aspects of proposal amended in PS, others maintained)

The final rules in CONC on financial promotions align with the FCA’s existing financial promotion regime, including the requirement for financial promotions to be clear, fair and not misleading. In addition, the FCA has carried across, substantially unchanged, the CCA advertising rules and OFT guidance.

As part of the consultation process, there was a concern that firms publishing catalogues on a biannual basis may not be able to comply in time with the new rules. The FCA has therefore included a specific transitional provision for catalogues of at least 50 printed pages, where these are first communicated to customers before 1 October 2014. If these catalogues comply fully with the CCA advertising rules in the previous OFT regime, such firms will not have to comply with the new CONC rules on financial promotions until 1 April 2015.

Timing (Proposal maintained in PS)

The rules in CONC and the high level standards apply to firms from 1 April 2014. In addition to the transitional provision described above and those available to high cost short term credit (HCSTC) providers, a 6 month transitional period has been provided in relation to certain CONC rules where a firm can demonstrate full compliance with a corresponding rule from the CCA or OFT guidance.

Supervision (Proposals maintained)

In line with the proposals consulted upon, the FCA has begun supervising firms from 1 April in line with its general supervisory approach. As part of this approach, the FCA requires consumer credit firms to report information to it on a regular basis, with more detailed requirements for higher-risk firms.

During the interim permission period, the FCA will adopt a hybrid supervisory approach, focusing on the way that firms treat their customers. In particular, the FCA will conduct a number of firm-specific visits to the largest firms within certain sub-sectors of the consumer credit market, including:

  • debt management;
  • debt collection;
  • home-collected credit;
  • HCSTC;
  • pawnbrokers; and
  • credit card issuers.

The FCA will also conduct event-driven supervision and targeted thematic work, as well as monitoring consumer credit financial promotions and reviewing consumer contract terms.

Consumer credit firms will also be required to report to the FCA on a regular basis, using a more simplified regulatory reporting structure than for existing FCA authorised firms. The reporting regime starts on 1 October 2014 and applies once a firm is fully authorised. The FCA’s final rules on reporting are unchanged apart from removing two data items from its product sales data reporting requirements, which apply to HCSTC providers and home-collected credit providers.

High-cost short-term credit

Definition (Proposal amended in PS)

The FCA has amended the definition of ‘high-cost short-term’ credit in its final version of the new rules, and consequential amendments to the FCA Handbook. The revision aims to protect community development finance institutions (known as ‘CDFIs)’ from the specific conduct rules on HCSTC.

The new definition of a HCSTC agreement is:

‘a regulated credit agreement:

  1. which is a borrower-lender agreement or a P2P agreement;
  2. in relation to which the APR is equal to or exceeds 100%;
  3. either:

    (i) in relation to which a financial promotion indicates (by express words or otherwise) that the credit is to be provided for any period up to a maximum of 12 months or otherwise indicates (by express words or otherwise) that the credit is to be provided for a short term; or

    (ii) under which the credit is due to be repaid or substantially repaid within a maximum of 12 months of the date on which the credit is advanced;
  4. which is not secured by a mortgage, charge or pledge; and
  5. which is not:

    (i) a credit agreement in relation to which the lender is a community finance organisation; or

    (ii) a home credit loan agreement, a bill of sale loan agreement or a borrower-lender agreement enabling a borrower to overdraw on a current account or arising where the holder of a current account overdraws on the account without a pre-arranged overdraft or exceeds a pre-arranged overdraft limit.’

Rollovers (Proposal maintained)

In respect of rollovers, the FCA acknowledged that in some circumstances, rolling over a loan offered flexibility to some customers and might be in their best interest. However, the FCA takes the view that the benefits of this flexibility quickly diminish and that excessive rollovers can hide financial difficulty. The FCA has maintained its proposed cap of two rollovers per customer.

CPAs (Proposal maintained, but clarified in PS)

In respect of the other headline restriction on high-cost short-term lenders’ practices, the proposal to limit the use of continuous payment authorities (CPAs) to two failed attempts, is maintained. However, the rules on CPAs have also been clarified. CPAs can be initiated by consumers on a one-off basis (and the definition of a CPA has been amended to make this clear) and can be re-set after two unsuccessful attempts if the firm makes contact and the consumer is able to pay the instalment by another method. CPAs can then be re-set for the remaining payments.

The use of CPAs to take part-payment has been banned. However, this ban does not prevent firms from entering into a repayment plan when exercising forbearance. However, the use of CPAs to take such payments will require the express consent of the consumer.

Prudential standards (Proposal amended in PS)

The proposed rules on prudential requirements for debt management firms have been amended as a result of the FCA’s earlier consultation. The FCA has maintained its direction of travel on prudential requirements, by retaining ‘relevant debts under management’ as the metric of prudential risk. However, the original proposal for a flat rate of 0.25% of ‘relevant debts under management’ has been revised. The new volume-based measure will be calculated as a sum of the following figures:

  • 0.25% of relevant debts under management up to £5m;
  • 0.15% of relevant debts under management between £5m and £100m; and
  • 0.05% of relevant debts under management above £100m.

The fixed minimum prudential requirement remains £5,000.

FOS, complaints and FSCS (Proposals maintained)

The FCA’s proposals in relation to complaints to the Financial Ombudsman Service (FOS), and redress for consumers have been maintained from the consultation. The FCA has made some clarifications, including that micro-enterprises are eligible to access the FOS in respect of consumer credit activities.

Not-for-profit debt advice bodies will be included within the FOS’ compulsory jurisdiction. However, the FCA has consulted on excluding not-for-profit debt advice firms from the general levy associated with the FOS. The regulator is expected to issue a policy statement which confirms this position, shortly.

The rules relating to recording, reporting and publishing complaints have been maintained from consultation. From 1 April 2014, consumer credit firms who have not been FSMA-authorised, must record complaints. However, the requirements to report and publish consumer credit complaints will not apply until a firm transitions to a full authorisation/variation of permission, or 1 October 2014, if later.

In keeping with the position consulted upon, the FCA will not include consumer credit activities within the Financial Services Compensation Scheme. However, the FCA will keep this position under review, particularly in respect of the debt management sector.

Thematic work

Thematic review in arrears management

In March the FCA announced that it will be conducting a thematic review into the arrears management practices and treatment of borrowers in difficulty by payday lenders and other HCSTC lenders.

The review will look at how payday lenders and other HCSTS lenders treat their customers when they are in difficulty. This will include how they communicate, how they propose to help people regain control of their debt and how sympathetic they are to each borrower’s individual situation. The FCA will also take a look at the culture in each firm to see whether their focus is truly on the customer or whether it is simply orientated towards profit.

Competition review of the credit card market

On 3 April, the FCA announced that, by the end of 2014, it intends to launch a market study comprising a full-scale competition review of the credit card market. Martin Wheatley, Chief Executive of the FCA, announced the FCA’s intention to conduct the market study in a speech entitled The growth of the UK credit card market.