Introduction
As a response to the 2007/2008 global financial crisis, the financial regulatory system in the UK has experienced a major restructuring to address the failings of the previous system. The regulation of consumer credit is being reconsidered, following the changes that began with the split of the FSA into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
From 1 April 2014 the FCA will take over responsibility from the Office of Fair Trading (OFT) for all consumer credit regulation. On 3 October 2013, the FCA published a consultation paper with its most recent detailed proposals for the new regime.1 This paper should be read in conjunction with the FCA’s March 2013 consultation paper containing its high-level proposals.2 The FCA’s new regulations will replace the Consumer Credit Act 1974 (CCA).
How will the regulation change?
Many CCA provisions will be transferred; however, there will be several changes to the regulations. First, the intention is that the licensing and regulatory framework of consumer credit regulation from the CCA will be replaced by the Financial Services and Markets Act 2000 (as modified by the Financial Services Act 2012 (FSMA)).
FMSA gives the FCA the power to authorise, supervise, and enforce against firms, as well as to make rules for the regulation of consumer credit. The FCA-drafted rules and guidance will be a central part of the new regime and will come into force on 1 April 2014. The FCA intends to include provisions of the CCA and OFT guidance into the new rules. The new rules will be included in a new sourcebook within the FCA Handbook: the Consumer Credit sourcebook (CONC). The CONC will include both the conduct requirements for consumer credit firms and the prudential requirements for debt management firms.
Authorisation and Licensing under the New Regime
What needs to be done?
(a) Firms currently licensed under the OFT
To carry on consumer credit activities legally from 1 April 2014, firms currently holding a licence from the OFT must apply to the FCA for interim permission by 31 March 2014. Group OFT licence holders must first obtain an individual OFT licence.
Firms without interim permission on 1 April 2014 will be obliged to apply for full FCA authorisation in order to legally continue consumer credit activities. Firms with full authorisation will be required to comply fully with all of the new requirements as of 1 April 2014, whilst firms with interim permission will be allowed to comply partially during the interim period.
The FCA website is now open for interim permission applications.3 Firms with interim permission will be considered by the FCA for full authorisation between 2014 and 2016. A one-off "authorisation fee" will be payable when the firm applies for full authorisation. In addition, there will be an annual fee.
(b) Firms that are currently regulated by the FCA
FCA-regulated firms must apply for an interim variation of permission before 1 April 2014.
(c) Firms that intend to become involved in consumer credit after 1 April 2014
Firms intending to become involved in consumer credit must apply for full authorisation after 1 April 2014.
(d) Changes for authorisation for overseas firms
Currently, there is no residence requirement for overseas firms carrying on consumer credit activities in the UK. However, the new regime will require such firms to have a UK establishment and to apply for FCA authorisation from 1 April 2014 unless they are:
- An EEA firm delivering services at a distance (within the E-Commerce Directive)
- An EEA firm operating under certain financial services single market directives
- An EEA firm authorised in home state with equivalent protection
New development: possible alternatives to authorisation
- Firms that are appointed representatives of authorised firms that contractually accept responsibility for the unauthorised firm carrying on regulated activities
- Firms that are self-employed agents of a principal held out as responsible for the agent’s conduct in carrying on the business of its principal (e.g., home collected credit sector)
- Firms that are exempt professional firms that can be supervised by a Designated Professional Body.
FCA v. OFT: What is Different for Regulated Entities in the New Regime?
High-risk and low-risk classification Firms will be categorised into high-risk and low-risk firms to enable the FCA to increase scrutiny on higher-risk firms and on the problems that will have a greater impact on consumers. Most consumer credit licence holders will be subject to the "core authorisation regime" for higher-risk activities.
Description of classifications
Lower-risk activities:
- Lending activities where selling goods and non-financial services is the main business and there is no interest or charges
- Hiring goods to consumers (e.g., cars)
- Credit broking where the selling goods and non-financial services is the main business and broking does not occur in the consumer’s home on more than an occasional basis
- Not-for-profit debt counselling and debt adjusting
- Not-for profit credit information services
Higher-risk activities:
- Consumer credit lending which includes interest/charges (e.g., overdrafts, credit cards)
- Credit brokerage
- Debt adjusting
- Debt counselling
- Debt collection
- Debt administration
- Credit information services
- Credit reference agency
- Peer-to-peer lending
Consequences of classifications Limited authorisation will be available for lower-risk firms. Firms with limited authorisation will enjoy more limited reporting requirements, less proactive supervision, reduced approved-persons requirements, and no capital obligations. For example, such firms will only have to supply "key data" (credit-related income, number of transactions and complaints) to the FCA; this is less onerous than the requirements on firms subject to the core authorisation regime (see below).
New operational requirements for consumer credit firms
(a) Approved-persons regime
The FCA is introducing a new approved-person regime, for which there is currently no direct equivalent. The purpose of pre-approval is to ensure that the individual is "fit and proper" for the position.
In higher-risk firms, pre-approval by the FCA will be required for all individuals fulfilling "significant influence functions". This will include directors, non-executive directors, chief executives and partners ("governing functions"). Furthermore, the regime will cover MLRO, and individuals in "significant management functions", "compliance oversight functions", and "systems and controls functions" amongst others. In limited permission firms, only those in apportionment and oversight functions need to be approved.
(b) Periodic reporting requirements
Firms will have to undertake regulatory reporting and product sales reporting.
Regulatory reporting will occur every six months -12 months. The scope of the reporting requirements will depend on the activities undertaken by the firm. Examples of the type of information that may be required include:
- Financial data (capital, assets, liabilities, profit)
- Volumes (revenue, customers, transaction volume per activity)
- Lender information (value of loans, interest rates)
- Debt management (capital requirements and resources)
- Client money and assets (client money held over five days, etc.)
- Debt collection (number and value of debts)
- Key data (credit related income, total revenue, number of transactions, etc. (for firms with limited permission))
Product sales data (PSD) relates to the original sale of the loan will be required every quarter. PSD is already required for mortgages, investment and insurance products. It includes:
- Loan details (amount, term, interest rate, fees)
- Loan reason
- Borrower date of birth and postcode
- Borrower and household income
- Loan type
Authorised professional firms need only comply with reporting requirements if they carry out consumer credit activities as mainstream activity.
(c) Enhanced complaints recording, reporting and publication rules
Firms will need to record all complaints received, including details of how they were resolved, and keep these records for three years.
Firms will also have to report and publish certain information about their complaints. The level of reporting will depend on the activities undertaken by the firm and the revenue earned from credit-related regulated activities (+ or - £5 million). Whilst firms undertaking lower-risk activities need only report annually the number of complaints received, firms undertaking banking and credit card activities have more onerous requirements, including six monthly reporting of total complaints outstanding per product/service, complaints upheld, and time taken to close the complaint, amongst other things.
Publishing requirements also vary according to the same criteria. The detail required ranges from annual publishing of the number of complaints received, to six monthly publishing of total complaints outstanding per product/service, with details of those upheld and the time taken to resolve the complaints.
Consumer credit complaints will be dealt with under the compulsory jurisdiction of the Financial Ombudsman Service, including complaints against not-for-profit bodies providing debt advice.
(d) Financial promotion rules
Firms will have to comply with financial promotion rules. The FCA will impose a high-level principle that all promotions be clear, fair and not misleading. The FCA will create additional rules, but these will be based heavily on existing OFT guidance and the CCA’s advertising rules.
Additional requirements will be placed on firms providing high-cost short-term credit.
(e) Client assets regime
Debt managements firms and large not-for-profit debt advice bodies will need to observe certain prudential standards:
- Hold the higher of £5,000 or 0.25% of the firm’s "relevant debts under management"
- Ensure the firm’s prudential resources exceed requirements at all times
- Appoint a director or senior manager responsible for overseeing the firm’s holding of client assets. For large debt management firms, individuals in these positions will need to be FCA approved.
- CP13/10: Detailed proposals for the FCA regime for consumer credit. Available at: http://www.fca.org.uk/your-fca/documents/consultation-papers/cp13-10; CP13/7: High-level proposals for an FCA regime for consumer credit. Available at: http://www.fca.org.uk/your-fca/documents/consultation-papers/fsa-cp137
- CP13/7: High-level proposals for an FCA regime for consumer credit. Available at: http://www.fca.org.uk/your-fca/documents/consultation-papers/fsa-cp137
- https://www.fca.org.uk/firms/interim-permission-consumer-credit
Client Alert 2013-306