Consumer credit regulation update

Posted by Richard Humphreys on
On the 6 March, HM Treasury and BIS published a joint consultation paper on the transfer of consumer credit regulation to the FSA in April 2014, and the FSA published its own consultation paper on the high level framework it proposes to adopt when it (in its revamped form as the FCA) takes over responsibility for the consumer credit regime.

In many ways, the content of both documents is unsurprising; the FSA style of regulation will apply largely unchanged. However, it does seem that some, though not all, industry concerns have been addressed.

A key objective for the new regime is "proportionality", which the FSA says means ensuring that additional costs and burdens are only placed on consumer credit firms where they are needed to provide consumer protection. Interestingly, the FSA has identified activities as either being lower risk or higher risk. Those who only carry on lower risk activities will be subject to a limited permission regime including lower authorisation requirements and a lighter touch supervisory regime. What's interesting is how the FCA has determined which activities are lower risk and which are higher risk.

The FSA has focused on the risks that an activity may pose to consumers and in particular; consumer hire activity and credit broking as a secondary activity have been determined as lower risk activities. Mainstream consumer credit lending and primary credit broking are included as higher risk activities and will be subject to the full FCA authorisation regime.

However, whilst not exempt altogether, consumer credit lending as an interest/charges free secondary activity, such as may be carried on by a supplier of goods and services, will be lower risk. The sting in the tail, of course, is that any business wrongly operating outside the FSA style perimeter will potentially be subject to much greater sanction. Broadly, the requirements for authorisation are the same as are applied by the FSA today; the only major difference, as part of the proportionality objective, is that only debt management firms will be required to comply with minimum prudential requirements.

All other firms will not be subject to prudential requirements. All firms who want to continue to undertake consumer credit activities should therefore, start thinking now about what authorisation is likely to mean for their business. The process which firms will need to go through will take time and at the point that firms submit their application for authorisation they must be in a position to confirm to the FCA that they have in place adequate policies and procedures (eg anti-money laundering; complaints handling; treating customers fairly) as well as adequate systems and controls relating to eg senior management compliance and oversight; general organisation requirements; compliance, internal audit and financial crime; and record keeping.

Timetable

Autumn/Winter 2013 The FCA will accept applications for "interim authorisation". This means that any current consumer credit licence holders who want to continue undertaking consumer credit activities after the 1 April 2014 must apply for interim authorisation. Any firm whose interim authorisation application has not been approved by 31 March 2014 will not be permitted to undertake any consumer credit activities and will be committing a criminal offence if they do so – so firms should make their applications in plenty of time to ensure they obtain interim authorisation.
Autumn/Winter 2013 The FCA is intending to issue its second consultation paper which will include draft detailed rules for the new regime. Whilst there is some indication what form these are likely to take the detailed rules wont be published until about six months before the new regime comes into force. This means that firms will need to act fast and should start to take steps to get themselves into a position where they will be able to meet the FCA's requirements when applying for full authorisation.
March 2014 The FCA intends to publish its policy statement in response to the second consultation paper. Firms will then have a six month period to ensure compliance. During this period if a firm is unable to demonstrate full compliance with FCA rules, it will still be acceptable to demonstrate compliance with CCA regulations/OFT guidance.
1 April 2014 Regulation of Consumer Credit will be transferred to the Financial Conduct Authority (FCA). The implementation date has not changed, despite delays in publishing the recent consultation papers.
Autumn/Winter 2014 The FCA will start to consider applications for authorisation from firms with interim permission. Except for those firms which will qualify for a limited permission regime, the authorisation process will be a rigorous process and one which is likely to differ significantly from the current OFT application process.
Spring/Summer 2016 Authorisation process will complete.

 

The timetable is provisional and the dates provided by the FSA are wide ranging. The only date which is immoveable is the date which the FCA will take over the regulation of consumer credit.

Interim authorisation process

This will be a very straight forward application process. All firms who currently have a consumer credit licence will need to complete an application form and provide basic information eg provide details about nature of the business, the size of the business, transactional level.

The application form needs to be submitted with a fee of either £150 (sole trader) or £350 for all other firms.

Some of the new regime requirements will not apply to firms holding interim authorisation; for example the approved persons and reporting requirement.

FCA authorisation process

The FCA authorisation process will be a rigorous process – the FCA will operate a strong gatekeeper function on the basis that it is easier to prevent bad firms from coming in than it is to get them out once they are in!

Firms will be required to complete a detailed application pack. All firms will be required to meet the FCA's threshold conditions:

Legal status Firms must have a legal status to carry out certain regulated activities.
Location of offices If a firm is a body corporate constituted under UK law, the firm's "mind and management" should be in the UK.
Effective supervision A firm must be capable of being effectively supervised by the FCA, including the complexity of its regulated activities, products and how the business is organised.
Appropriate resources A firm must be able to demonstrate appropriate financial resources, nature and scale of business and skills and experience of those managing the firm's affairs. Appropriate resources relates to both financial and non financial resources.
Suitability A firm must be able to demonstrate the competence and ability of management, and that the firm's affairs are conducted in an appropriate manner regarding the interests of consumers and the integrity of the UK financial system.
Business model A firm will need to submit a detailed business plan which will be assessed by the FCA.

Limited permission regime

The threshold conditions which will be applied to firms carrying on lower risk activities will be different with some threshold conditions not applying eg legal status and business model and others will be modified with lighter evidence to demonstrate compliance being required.

Approved persons regime

The FCA wants to ensure that firms are well-run, recognise the risks they face and have appropriate strategies, systems and controls in place. The FCA wants to ensure that those who run the business meet minimum standards and are "fit and proper" persons. In making this determination the FCA will consider an applicants:

  • Fitness and propriety
  • Competence and capability
  • Financial soundness.

Only those performing significant influence functions will be required to apply for individual approval. The FSA has identified those functions which it considers to be significant influence functions and include those responsible for: apportionment and oversight; compliance oversight and the Money Laundering Reporting Officer.

There will be no requirement for those who deal directly with consumers to be approved, which is particularly good news for those firms with substantial customer interaction.

Firms with limited permissions will only be required to have one individual FCA approved for the apportionment and oversight role.

Appointed representative (AR) regime

The AR regime offers an alternative to firms for whom the cost of regulation would outweigh the benefit to their business or those who do not have the infrastructure or internal systems and controls to become authorised themselves. Some firms will be able to take advantage of the limited permission regime, but others will not; in particular primary credit brokers.

AR's are exempt from authorisation an authorised firm, the "principal", accepts responsibility for the regulated activities which the AR undertakes. As such, this should not be viewed as a way around having to comply with the FCA's requirements. Principals are only likely to take responsibility for those AR's where they are satisfied that the AR meets all the necessary requirements. In addition, whilst the model has been relatively successful in the insurance market, there remain fundamental concerns about its applicability to the credit market which these proposals do not at first sight seem to address.

Supervision

Once firms have got through the authorisation process, ongoing day to day supervision will be very different from that currently operated by the OFT. All firms will be subject to the FCA's 11 Principles for Businesses which set out the fundamental obligations of firms under the FCA regime and include such requirements as: a firm must act with integrity; a firm must conduct its business with due skill. Care and diligence; a firm must pay due regard to the interests of its customers and treat them fairly; and a firm must deal with its regulators in an open and co-operative way.

Additionally, firms will be required to meet certain of the FCA's requirements in the senior management arrangements, systems and controls including the general organisational requirements, compliance, internal audit and financial crime and record keeping requirements.

There will also be a detailed Conduct of Business sourcebook for consumer credit which take into account the OFT guidance; Provisions under the Consumer Credit Act and certain requirements contained in industry codes. The detailed rules will not be available until later this year.

Firms will be subject to regular reporting requirements, although for firms with limited permission will have a reduced reporting requirement.

Enforcement

Perhaps the biggest change will be the powers which the FCA will be able to exercise over firms. Traditionally, the OFT has not supervised firms once they have been granted a licence. The Financial Services Act 2012, the OFT has {will have} the power to suspend consumer credit licences, but only where there is an urgent need to protect consumers from harm.

By contrast the FCA has very wide investigatory powers allowing it to:

  • require people to provide information or documents or attend interviews
  • apply for warrants to enter and search premises.

The FCA has the power to bring disciplinary, civil and criminal proceedings. These powers include the ability to:

  • Withdraw firms authorisations or individual approvals
  • Prohibit individuals from working in financial services
  • Impose substantial financial penalties
  • Seek injunctions
  • Apply to court for freeze a firm's or individual's assets
  • Seek restitution orders
  • Publish warning notices
  • Require consumer redress.

Overall, what is perhaps most interesting about these consultation documents is the limited extent of CCA repeal at this stage. It does appear that only sufficient is being done to facilitate hand over to the new regime, with the FCA then being tasked with a five year plan to complete the process. This may ease initial authorisation, but at the cost of stretching out the changes over a number of years. It may also increase the tendency for the FCA to adjust provisions on transfer to the new handbook more than might otherwise have been the case.

About the Authors

Specialising in CCA compliance and FCA regulatory advice, Richard is a partner in Blake Morgan's Financial Services group.

Richard Humphreys
Email Richard
01865 254243

View Profile

Specialising in financial services regulation, Felicity advises regulated firms and Approved Persons, private individuals and businesses on financial services issues.

Felicity Rowan
Email Felicity
020 7814 6877

View Profile