Consumer credit law exemption
The law as it stands specifies that DCS consumer credit agreements with no interest/substantial charges that do not require more than four repayments in less than 12 months are exempt from regulation.
Following the passing of new legislation, this exemption, commonly known as the "four repayments or less" exemption, will be extended to "twelve repayments or less". The other conditions to be met alongside the specified repayments will not change. This will take effect from 18 March 2015 and is in line with the FCA's December 2014 consultation which addressed the issue of widening the scope of the exemption in furtherance of pleas from the Insurance industry. Whilst this change is no doubt welcome news for insurers and other suppliers who operate on an annual charging cycle (such as clubs and utility companies), it is still rather unexpected and may have unforeseen consequences for mainstream credit companies.
Previously, the four payments or less exemption was not much used by the consumer credit industry. This was probably due to the fact that it did not enable consumer credit suppliers to offer attractive products to their customers based on monthly payments within a 12 month period. Consumer credit suppliers will, however, now be able (in theory) to design products which are more aligned with what customers want and more importantly can seemingly afford.
That said, the change in its present form may be short lived, because the wider implications for the consumer protections afforded in respect of regulated consumer credit agreements remain unclear. FCA authorised firms will obviously be expected to comply with the general rules and principles imposed on them by the FCA's regulatory regime e.g. Treating Customers Fairly (TCF) and the general Principles for Businesses. It is, however, foreseeable that the exemption will now allow many firms not presently regulated by the FCA to start offering products to consumers designed solely around this exemption. These firms will not be required to comply with the FCA's regime as expected of their FCA authorised counterparts, because they won't need to be authorised. Moreover, whilst the broking of exempt agreements is usually a regulated activity, that is not the case in respect of this particular exemption.
Clearly, such products would be limited in scope; the underlying asset would need to be relatively low value to make a 12 month payment profile attractive to consumers. However, this extension of the exemption to twelve repayments may foreseeably open up a "Pandora's box" of problems for certain sections of the consumer credit finance industry in that a significant aspect of the consumer credit industry may now be outside regulation.
With all of this in mind, it seems far from clear if the full implications of this change have been properly thought through by the Treasury and FCA, particularly regarding the potential ramifications the change will have for consumers. It will be interesting to see what reaction this will generate when the FCA do pick up on this oversight, and how it they will seek to rectify the problem.
Whether you are already regulated by the FCA, have been regulated by the OFT, or are considering entering this market, Blake Morgan can provide you with the assistance necessary to ensure your firm complies with the relevant regulatory requirements.