As published in Leasing World, 2 May 2013
On 6 March 2013, the Government and the Financial Services Authority (FSA) published consultation papers on the proposed new regulatory regime for consumer credit which, from April 2014, will be administered by the new Financial Conduct Authority (FCA). We look at the key features of the new regime, as well as the planned transition arrangements and Interim Regime.
OFT to FCA
While consumer credit has previously been dealt with by the Office of Fair Trading (OFT), under the new regime the Government has drafted two pieces of secondary legislation to allow the transfer of consumer credit regulation to the FCA:
- The Financial Services Act 2012 (Consumer Credit Order 2013) which provides for the retention of much of the Consumer Credit Act (CCA) and its future enforcement by the FCA; and
- The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013 which is mainly concerned with transferring consumer credit activities into the FSMA framework.
The Regulated Activities Order is also responsible for modifying the Financial Services and Markets Act (FSMA) to apply to credit, including amendments to the current FSMA Appointed Representatives and Financial Promotions regimes, as well as creating the Interim Permissions Regime.
The new regime
The proposed new regime contains a number of important features which lenders need to be aware of. These include:
1. Arrangements for a smooth transition
The new regime will be tailored and proportionate to the credit market. In order to make the transition to the new regime as smooth as possible, a number of measures have been put in place. For example, a new rulebook for credit will be produced, closely based on the current regime, and the majority of the CCA will remain in place after April 2014, reducing the level of potential market disruption. In addition, transition and grace periods will also allow for a phased implementation over the following two years. The timetable is however very tight and some will say it is impossible to prepare in time. For those lenders that have not been regulated by the FSA previously, now the FCA, there is an awful amount of work to do to be ready in time with some major business changes to be made in terms of new levels of compliance together with a new supervision and enforcement regime.
2. Better arrangements for lenders
Consumer credit lenders are set to benefit under the new regime from the removal of the cap on the cost of credit and a lack of capital adequacy requirements. When compared to other financial services companies, lenders will face lower fees and no contribution to the Financial Services Compensation Scheme.
Further, the formerly separate categories of credit ‘broker’ and ‘intermediary’ will be combined into a single new definition of credit broking, although no changes to the boundary between (regulated) consumer agreements and (exempt) business agreements are currently expected. Firms that are not licensed as credit brokers but have been carrying out credit intermediation will require authorisation under the new regime. Lenders should start discussions with their intermediaries now in order to ensure they are aware that they will need to apply for interim permission and then full authorisation within the timeframes imposed.
It is also worth noting that the FCA aims to cover the cost of regulation from regulated firms in a manner which is ‘as fair and efficient as possible’. A further consultation on the fee structure will be undertaken in autumn 2013.
Though it won’t be necessary to inform all existing customers of the change in regulator, from 1 April 2014, lenders must include a statement in all correspondence with their customers confirming who they are regulated by and whether they have an interim permission, as well as whether they are authorised or have limited permission.
This is likely to have significant systems implications for firms moving from interim to full authorisation. These firms will need to change their systems in time to ensure the required statement is included on every letter sent to the customer in relation to consumer credit activity, and that pre-contract information and agreements entered into after 1 April 2014 properly describe the regulator. The phasing in of this new requirement may require a complicated system change, and transitional issues should be anticipated.
Under the new regime, firms will also be required to report certain information to the FCA to allow it to maintain a picture of the overall size and breakdown of the market in terms of turnover and numbers of customers. During the Interim Permission period, the FCA will apply reduced reporting requirements, in particular for firms with no previous experience of FSA regulation.
Additionally, the CCA advertisements regime will be replaced by the FSMA financial promotions scheme; breach of which is a criminal offence. The new rules will be consulted on in autumn 2013, and will not be able to go beyond the requirements set out in the current Consumer Credit Advertising regulations.
4. Enhanced enforcement and supervision
In administering all the elements of the new system, the FCA will have an extensive range of new enforcement tools available to it, including the power to withdraw authorisation. These will apply both to those elements of the CCA, which are continuing after April 2014, and the new rule book, into which the Government is aiming to move as many of the CCA provisions as possible by 2019.
The FSA has proposed a two-tier supervisory system. Firms with a significant number of customers, such as the large retail banks, will be subject to a ‘fixed portfolio’ regime with a nominated supervisor. Smaller firms will be subject to a more reactive ‘flexible portfolio’ regime with access to a team of sector specialists. This will also include structured conduct assessments, event-driven work - when specific problems emerge - and intensive campaigns - where products may be putting customers at risk. For smaller and lower risk firms, a lighter touch will apply.
With regards to risk classification, the consultation paper has specified new boundaries as to what will be classed as lower and higher risk activities. The lower risk category that covers a ‘limited permission’ for firms will apply to: motor dealers for whom credit is a secondary activity; consumer hire; lending where there is no interest or charge; and not-for-profit debt counselling. The higher risk category will include activities such as: consumer credit lending; credit broking (including intermediaries); debt-collection activities; and credit reference agencies. Lower risk firms will benefit from less intense regulator scrutiny, involving largely reactive supervision, lower fees and more limited information reporting requirements.
5. A lighter touch for motors dealers but not for mainstream credit brokers
The new regime also provides for a less onerous direct authorisation regime for retailers and motor dealers as these firms will fall under the lower risk regime for consumer credit activity. This may mean they no longer need to become Appointed Representatives of lenders. In turn, lenders may also benefit from reduced reporting requirements and fewer constraints in regards to Approved Persons.
In addition, lower risk firms will now find themselves operating under a lighter touch supervisory system which, under the proposals in the consultation, could see a firm being authorised to carry on certain credit related activities and operate as an appointed representative. This is a step change from the existing FSMA regime, under which, for example, a motor dealer who wanted to access the limited permission regime for permission to carry out credit brokerage would be unable to continue to act as an appointed representative for an insurance brokerage. Currently, the firm would therefore either have to become an authorised dealer for both activities - requiring a more costly ‘higher risk’ authorisation - or find a principal to take it on as an appointed representative.
In contrast, mainstream credit brokers will fall under the higher risk regime and will need to seek interim permission for the 1 April 2014 start date and prepare to move over to full authorisation by the 1 April 2016. Under the current proposals, lenders will only be able to act as an appointed representative once they are fully authorised, and not while they simply hold interim permission. As such, credit brokers may have a period of time where even if a lender is prepared to be their appointed representative, they simply can’t. This may have an impact on credit brokers and lenders doing business together during this interim period as lenders will have to take full responsibility for their credit brokers at this time. As such, lenders will want credit brokers to demonstrate they are fit and proper before the lender will consider becoming their appointed representative and advice should be sought now. If credit brokers have their own authorisation, they will be subject to the higher risk regime with more stringent supervision and reporting in comparison to motor dealers.
6. Transition arrangements and the Interim Permission Regime
The FCA has agreed to operate an Interim Regime between April 2014 and April 2016, during which consumer credit firms will have an opportunity to get used to the new requirements, while completing the authorisation process which will replace the current system of licensing.
Consumer credit firms not already regulated by the FCA that do have an existing OFT consumer credit licence should notify the FCA, and obtain an interim permission for the consumer credit activities covered by its licence. Firms already regulated by the FCA or the PRA for non-consumer credit activities, that have an existing OFT consumer credit licence, should notify the FCA and obtain an interim variation of permission for the consumer credit activities covered by its licence.
Later in the year, lenders and all types of credit brokers will be asked to apply online for an Interim Permission (IP) from the FCA, disclosing what types of consumer credit activity they are currently licensed for, and some basic contact and personnel details. Those failing to apply for an IP will have to cease lending or face enforcement action and sanctions. Firms will therefore want to ensure they, and their intermediaries, have the correct consumer credit licences in place to cover any activities they may want to undertake during the Interim Regime.
Once an IP is granted it will remain valid until either a firm becomes fully authorised by the FCA, or it obtains a ‘Variation of Permission’ if already authorised by the FSA for other purposes. Consumer credit companies will be encouraged to apply for ‘Full Authorisation’ or a ‘Variation of Permission’, and those categorised as ‘higher risk’ will be subject to the standard authorisation process. ‘Lower risk’ firms will be able to apply for significantly less onerous ‘Limited Permission’ authorisation.
When a completed application is received, the FCA will aim to decide whether to grant authorisation within six months - although the process could stretch to 12 months. The IP will remain in place while the decision is taken so could be in place beyond April 2016. A refusal to grant authorisation to a firm will be subject to appeal.
During the Interim Regime, there will be limited reporting and “approved persons” requirements. A modified version of the FSA’s Approved Persons (AP) regime will be applied by the FCA to parts of the credit industry, in order to vet key individuals within firms to ensure they are “up to the job”. Credit firms will not have to appoint an AP for their customer-facing functions, but will be required to have them for key functions such as the company, systems and controls, and compliance. Firms with a Limited Permission will be required to have only one AP.
7. Financial crime
Many current criminal sanctions are to be repealed. All regulated firms will have to take measures to prevent themselves and their customers from being exploited by criminals, and firms subject to the Money Laundering Regulations 2007 will have to take further measures, including appointing a Money Laundering Reporting Officer.
The new system will involve a tiered framework of standards, including 11 Principles for Business, which will apply from April 2014, dealing with the general behaviour required of consumer credit firms.
Other high level standards covering how firms should organise and manage their affairs, as well as detailed conduct standards in relation to customer interaction will also be implemented. These will be based on the conduct standards currently set out in those parts of the CCA being repealed, and in OFT guidance.
Unlike for other regulated financial services, credit will not be subject to high level rules relating to training and competence, or requiring qualifications for certain activities.
What next ...
Lenders and credit brokers should start preparingnow to ensure they are fully compliant with the CCA and that all OFT guidance notes have been taken into consideration with regards to their operational procedures, as well as their written policies, practices and procedures so there are no authorisation issues under the new FCA.
Businesses that are not licensed correctly and miss the boat to transfer their business over to the FCA will not be able to transact. As such, it would be strongly advisable for all lenders to conduct an audit and begin agreeing a project plan now, ready for the transfer. This should include immediate communication with credit brokers and intermediaries to ensure all parties are prepared, reducing or eliminating any negative impact the transfer could have on business relationships.
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.