Date:

Proposed changes to the consumer credit regime

Government and FSA consulation on transfer of regulation of consumer credit to the financial conduct authority.

Background to the new financial services regulatory structure.

The current role of the Office of Fair Trading (the OFT) as consumer credit regulator is due to change following the introduction of the new regulatory structure for financial services.

 

The new regulatory structure from 1 April 2013 is as follows:

(a) the transfer of the majority of the functions of the Financial Services Authority (FSA) to the Financial Conduct Authority (FCA) (the FCA operating as a renamed FSA rather than a new body); and

(b) the creation of the Prudential Regulation Authority (PRA).

The legislation under which the new structure is introduced is the Financial Services Act 2012 in force from 1 April 2013 which makes extensive amendments to the Financial Services and Markets Act 2000 (FSMA).

The PRA will be a subsidiary of the Bank of England and will be responsible for "micro-prudential" regulation of "systemically important" firms, including banks, insurers and certain investment firms. These firms are referred to as dual-regulated firms because, while the PRA will regulate prudential issues, the FCA will act as these firms' conduct regulator. The PRA will have operational independence from the Bank of England for day-to-day regulation and supervision of dual-regulated firms. Its focus will be on setting institution-specific capital requirements.

The FCA will inherit the majority of the FSA's existing roles and functions and will adopt the legal corporate identity of the FSA. The FCA will:

(a) be responsible for the conduct of business regulation of all firms, including those regulated for prudential matters by the PRA;

(b) be responsible for the prudential regulation of firms not regulated by the PRA. These firms are referred to as FCA-only firms or FCA-authorised firms; and

(c) inherit the FSA's market conduct regulatory functions, with the exception of responsibility for systemically important infrastructure which will be transferred to the Bank of England – in essence be responsible for supervising the markets for the issuing of securities, including acting as the UK competent authority for listing. This means that the FCA will be responsible for:

(i) the regulation of issuers and major shareholders with the requirements of the Disclosure and Transparency Rules and the Listing Rules and drawing up the Code of Market Conduct;

(ii) exercising the civil and criminal powers currently available to the FSA under the market abuse and insider dealing provisions of FSMA; and

(iii) performing the FSA's current functions relating to the suspension and removal of financial instruments from trading in order to protect the interests of investors or the orderly functioning of the financial markets.

From 1 April 2014, the FCA will take on responsibility for consumer credit regulation from the Office of Fair Trading. These notes summarise the proposals for this transfer of responsibility. The provisions enabling this transfer and a number of other consumer credit provisions are included in the Financial Services Act 2012.

The idea behind the transfer of the OFT's consumer credit responsibilities to the FCA is to create a single retail financial services regulator. This will include the transfer of second and subsequent charge mortgage regulation to the FCA at the same time. This transfer is to resolve what the Government considers as a fundamental weakness in financial services regulation – the split in responsibility between the OFT and the FSA.

The FCA will have a single overarching strategic objective to ensure that markets function well and three operational objectives:

(a) to promote effective competition in the interests of consumers;

(b) to secure an appropriate degree of protection for consumers; and

(c) to protect and enhance the integrity of the UK financial system.

The FCA intends to be tougher and more proactive than the FSA in tackling consumer detriment and intervene earlier. To support this, it will have a new product intervention power allowing it to ban or impose requirements on financial products.

Summary of the proposed transfer of consumer credit to the FCA

The proposal is to replace the statutory basis of consumer credit regulation under the Consumer Credit Act 1974 (the CCA) with a rules-based approach to result in a simpler but more flexible regime.

Regulation will be different to the current structure as the new regime will be designed to focus on higher risk firms (such as payday lenders, pawnbrokers and debt collection) whereas lower risk firms will not have to meet such onerous standards and will pay lower fees (such firms including not-for-profit debt counselling, retailers introducing customers purchasing goods or services to a finance provider, including motor dealers). Effectively, there will be different standards for firms that carry out specific activities.

As mentioned above, the FCA will have different (and greater) enforcement powers to the OFT.

The current licensing arrangements will be replaced by an interim permission for licence holders to continue to carry on regulated consumer credit activities and then an authorisation process. Credit advertising will become subject to the financial promotions regime of the FSMA. There will be prudential requirements for debt management firms. All authorised firms will be subject to supervision by the FCA and must report to the FCA.

The framework for this new regime will be:

(a) a combination of existing and new FCA rules (for example some aspects of existing OFT guidance for credit firms will be transposed into FCA rules or guidance);

(b) the FSMA (as amended by the Financial Services Act 2012) and its secondary legislation; and

(c) retained provisions of the CCA and its retained secondary legislation.

As regards current industry codes, current proposals are to consult further on these in late 2013 on whether they or part of them should be transposed into the new FCA rules.

The Government will use its powers under FSMA and the Financial Services Act 2012 to transfer regulation of consumer credit to the FCA and to carry forward parts of the CCA (where they cannot easily be replicated through FCA rules) to the new regulatory regime. 

Implications for current licence holders

New licensing

(a) Those currently holding consumer credit licences will need to notify the FCA that they want an interim permission and this will allow them to continue to carry on regulated consumer credit activities after 1 April 2014.

(b) Those businesses who do not notify the FCA that they want an interim permission and which continue to carry on regulated activities after 1 April 2014 may be subject to enforcement action by the FCA

(c) The interim permission will have a limited lifespan and all licence holders will need to be fully authorised by 2016 – see below.

FCA authorisation

(a) Authorisation is the FCA equivalent of the current OFT's licensing system.

(b) There will be a phased approach to authorisations so that the FCA plans to ask different types of firms to apply by different deadlines.

(c) To become authorised, licence holders will be required to demonstrate that they satisfy the FCA's standards and will continue to satisfy them as long as they are authorised. These standards are to be called threshold conditions examples of which include; the legal status of the business, the location of its offices, links it may have with other firms and whether there are appropriate financial resources appropriate to the nature and scale of the business.

(d) Once a completed application for authorisation is received, the FCA will have six months to decide whether to grant authorisation, they will allocate a case officer to review the application and seek additional clarification.

FCA supervision

(a) The FSA's stated purpose is that the FCA will supervise the credit market "in a proportionate way" with firms being categorised based on criteria such as size, number of customer and the perceived risk to consumers of the firm's activities. The category a firm is placed in will determine the way it is supervised and the extent of the FCA's supervision.

(b) Those currently regulated by the FSA will be aware of the FSA's structure of rule books with high level principles. FCA supervision will be the same, with the FCA expecting firms to comply with these high level principles such as "treating customers fairly". These principles form a general statement of the obligations that will apply to an authorised firm and are unlikely to mean major changes if a firm already complies with the standards under the current OFT regime.

FCA fees

(a) Firms will pay a one-off fee for an interim permission that will be valid until the firm becomes authorised. Current suggestions are for charges of £350.

(b) The FCA will consult in October 2013 on how fees and levies will be calculated for consumer credit firms under full authorisation.

Government publications and consultations relating to consumer credit

For the new regulatory structure, the Government has produced the following:

(a) a joint HM Treasury and BIS consultation (the Government consultation). The purpose of this is to set out the overarching model and approach for regulating consumer credit under the FCA and describe the legislative provisions that will underpin the new regime; and

(b) a FSA consultation paper on high level proposals of the FCA regime (CP13/7). This covers the FCA's proposed high-level approach to the regulatory regime, including how it intends to use its powers and begins the process of consulting on the rules that it will apply.

In the future the FCA will be publishing further consultations covering the rules replacing repealed Consumer Credit Act provisions, prudential rules and client asset rules.

Timeline

From now until 1 April 2014, the Government has set out the following timetable:

Date

 

17 April 2013

Response deadline for the Government’s Impact Assessment for the proposed new system

1 May 2013

Response deadline for the Consultation Papers themselves

June 2013

Publication of final draft of the secondary legislation

July/September

Legislation laid in Parliament

Summer/Autumn 2013

Feedback on responses to the Consultation Papers

Autumn/Winter 2013

Second consultation, covering all remaining aspects of the regime, including conduct rules

October/November 2013

Detailed proposals for fees, and the levies for the Financial Ombudsman and Money Advice Service

Autumn/Winter 2013

Consultation on “plain language guidance” to help firms understand and navigate the new regime

March 2014

Feedback on the second consultation, including final rules

March 2014

Final version of plain language guidance

March 2014

Fees proposals for 2014/15

The Government consultation

The FSMA Model

(a) The consultation paper sets out the proposed model using the following building blocks:

 (i) rule-making (the FCA will be authorised under FSMA to make rules binding on all firms);

 (ii) authorisation (a firm wanting to carry on regulated activities must be authorised or exempt);

 (iii) approved persons (allowing the FCA to scrutinise key individuals in firms);

(iv) supervision (firms are subject to on-going supervision and monitoring and required to supply key information on a regular basis to the FCA); and

(v) enforcement and redress (the range of powers the FCA has).

The paper covers:

(a) conduct requirements and rules –

(i) The current proposal is that the conduct provisions which will be removed from the CCA will be replicated as FCA rules and the OFT’s guidance will be replicated as FCA rules and guidance where appropriate.

(b) the approach the FCA will take to authorisation of firms,

(i) a different approach for lower-risk and higher-risk activities, a new definition for two broad groups of activities which will be further split within these groups based on firm and sector specific risks.

(ii) the Government proposals include lower-cost alternatives to authorisation, with fewer regulatory requirements for firms that are carrying on certain consumer credit activities and/or meet specified criteria such as the appointed representatives and exempt professions regime;

(iii) and the options available for those currently operating under cover of a group licence such as Not-for-profit debt advice bodies.

(c) the scope of the new consumer credit regime – the intention is for this to remain broadly the same but with changes to:

(i) regulation of peer to peer activities; a new regulated activity, operating an electronic system in relation to lending.;

(ii) the exemption from regulation of the activities of third party tracing agents; therefore these firms will not require an interim permission to carry on this activity;

(iii) modification to definition of operating a credit reference agency; the Government is proposing that, CRAs should be directly supervised by the FCA;

(iv) credit intermediation to be part of regulated credit brokerage;

(d) enforcement powers – The FCA’s enforcement powers under FSMA are significantly greater that the OFT’s powers under the CCA. The FCA will work alongside Local Authority Trading Standards Services among other bodies, to uncover and stop unauthorised business, such as loan sharking. The FCA will also seek to ensure that where a firm has committed wrongdoing, consumers are adequately compensated.

(e) the interim permissions regime - existing OFT licences will lapse on 31 March 2014 and Interim Permissions will begin on 1 April 2014 until April 2016.

The paper also contains a table showing how each provision of the CCA is proposed to be dealt with under the new FCA regime (whether retained in its current form or repealed in full and its substance set out in the FCA rules and whether retained or repealed in whole or in part). At this stage this paper is simply asking for thoughts on the proposed framework and rules for the new consumer credit regime. The FSA will consult again later in 2013 on the details of the regime’s design, taking account of responses to this paper.

In the next edition of the newsletter, Jo and Leanne will take a look at the detail of the changes proposed and provide lenders with further guidance on the key action points in order to help consumer credit lenders prepare for the changes.  As the reforms evolve, we will keep you posted with regular news on changes to consumer credit and how this may impact your business.  Keep an eye out for the dates for our seminars being run in the summer and throughout the coming year, which will be run as and when there is more to report to help our clients get ready.  

If you have any questions or would like more information please contact: 

  Leanne Grunnill, Associate

  T: 0161 838 0153

  E: Leanne.Grunnill@dwf.co.uk

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.