Consultation Response. High-level proposals for an FCA regime for consumer credit. Response from the Money Advice Service 1 May 2013.

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1 Consultation Response High-level proposals for an FCA regime for consumer credit Response from the Money Advice Service 1 May 2013 Colin Kinloch Debt Advice Policy Manager Colin.Kinloch@moneyadviceservice.org.uk

2 About us The Money Advice Service is a UK-wide, independent service set up by government to improve people s financial well-being. Our free and impartial money advice is available online, and by phone, web-chat or face to face with one of our Money Advisers. We also work with the debt advice sector to improve the quality, consistency and availability of debt advice. Our core statutory objectives, as set out in the Financial Services Act 2012, are to enhance the understanding and knowledge of members of the public about financial matters (including the UK financial system), and to enhance the ability of members of the public to manage their own financial affairs. We work closely with others to achieve this. The Money Advice Service is paid for by a statutory levy on the financial services industry, raised through the Financial Conduct Authority. We are responding to this consultation in light of our statutory role to work with partners to increase the availability, quality and consistency of debt advice as well as our wider role to ensure that consumers are well informed and empowered to take action across the existing and emerging retail financial services marketplace. Executive summary The Money Advice Service broadly supports the structure of regulation proposed in CP13/7. We appreciate the depth of thought that has been given, in particular, to the regulatory approach to not-for-profit debt advice providers and our response focusses on this area. In order to provide certainty to consumers, we believe that all providers of debt advice should be subject to the compulsory jurisdiction of the Financial Ombudsman Service although we see merit in taking steps to limit the potential financial exposure of not-for-profit bodies. We believe that prudential requirements and client asset rules should apply to all organisations that handle and distribute client funds as part of their debt management activities. We would further recommend that a client asset oversight function be introduced for not-for-profit debt managers. We would support greater consideration being made of the role of customer functions in debt advice organisations. We appreciate that the individual responsible for apportionment and oversight in a debt management business will be held responsible for ensuring the compliance and competence of the firm s advisers however we are not convinced this goes far enough. We believe it would be appropriate to give more thought to how the compliance and competence of advisers could be ensured in not-for-profit bodies. We recommend the FCA formally incorporate the quality framework we have recently consulted on for debt advice standards into the new regime for all debt advice providers. We would be happy to work with FCA staff on this following publication of our final framework in the summer.

3 Response When taking decisions around exercising its new consumer credit functions in the debt advice field we believe the FCA should in all cases focus on the nature of the interaction between the adviser and their client. Where the interaction is complex it will be inherently risky like advice in other fields such as investments - and so the adviser should be demonstrably highly skilled and subject to appropriate oversight. It is this complexity as much as concerns around incentives created by profit seeking that should drive authorisations, supervisory and enforcement activity. Q2: Do you agree that we have included the right activities in the higher and lower risk regimes? We agree in broad terms that the right activities have been included and welcome the phrasing of the classifications in relative terms rather than suggesting, for example, that the provision of debt advice on a not-for-profit basis is low risk. Q4: Do you have any comments regarding our proposals for the interim permission regime? We are concerned about the potential for a multi-tier approach to consumer protection during the period that organisations are able to operate prior to receiving full authorisation. We see risks that organisations may seek to apply for OFT consumer credit licences in advance of 1 April 2014 in order to passport in and with the expectation that this will come with lower conditions. This could present its own challenges to the OFT however it appears that an organisation could operate under an interim permission for up to two years without needing to apply for full authorisation. We are mindful of the operational challenges the FCA and the industry will be working under during the transition period however we are keen that consumer protection remains a priority during this period. A further point we would recommend is that as part of the publicly accessible record on a body providing debt advice operating under an interim permission it would be useful for consumers to see whether or not an organisation had or was working to a quality standard that was mapped to our framework. We would suggest that the FCA could ask for this information as part of the interim permission notification process and make adherence to such a standard a condition of granting full authorisation when an application was made. Q5: Do you agree that we should apply the Threshold Conditions as proposed? We are broadly happy with the proposal but would recommend that business model analysis take place, potentially on a thematic level, for limited permission not-for-profit debt advisers. This would be particularly relevant for organisations that receive funding via the Fair Share model.

4 Q7: Do you agree with our proposal not to apply a customer function to any consumer credit activity, particularly debt advice? We believe that advising over-indebted people on the most appropriate way to respond to financial difficulties can often be an extremely complicated activity. The advice given can have a material impact on people s lives in the long-term in a manner that is often at least as significant as decisions around allocating assets when choosing between investment options. We know too that there a number of qualifications debt advisers could work towards to demonstrate their professionalism and we support and encourage them to do so. For these reasons we are concerned that greater consideration has not been given to constructing customer functions in the debt advice space. We understand the requirement to implement a proportionate regime but believe there are additional steps the FCA could take that would meet this requirement while doing more to enhance consumer protection. The proposal that the individual responsible for apportionment and oversight in a debt management business will be held responsible for ensuring the compliance and competence of the firm s advisers is a good start. We look forward to seeing more detail on this in the autumn consultation and believe consideration should be given to the potential for an individual with this responsibility in not-forprofit bodies, particularly those that handle client funds. It may be appropriate to consider whether this individual should be required to hold or be working towards one of the existing qualifications already available such as that developed by the Institute of Money Advisers. We suggest that it would be appropriate to consider whether adherence to the relevant individual elements of the quality framework we have been consulting on should be a condition that is met by the individual with apportionment and oversight responsibilities. We would be keen to work with the FCA on this issue in pursuit of our own statutory requirement to work with others to promote the quality of debt advice. Q11: Do you agree with our proposal to apply prudential standards to debt management firms only? We do not agree with this proposal. We believe that in the interests of consumer protection not-forprofit bodies that carry on debt management activities should also be subject to prudential standards. We do not believe this would be overly burdensome given reserving requirements already imposed by the Charity Commission on not-for-profit bodies operating in this area. We also believe that efforts should be made to bring forward minimum capital requirements during the period that a body will be operating with an interim permission. Q15. Do you agree with our proposed approach to financial promotions? We are pleased to see that the FCA intends to align the supervision of consumer credit advertising with its existing financial promotions regime. It is crucial that as consumers becoming increasingly

5 willing to turn to non-mainstream forms of borrowing the clarity of promotions is kept under close watch across the market, with swift action taken as appropriate. Q16: Are there provisions within industry codes that you think should be formally incorporated into FCA rules and guidance? We believe that a number of industry codes contain elements of good practice that should be formally incorporated. In particular these include: the provisions around supporting customers in financial difficulties contained in the Lending Code the debt and mental health evidence form and associated guidance produced by the Money Advice Liaison Group the debt management plan protocol facilitated by the Insolvency Service, including its requirement on protocol compliant firms to work towards our quality framework the continuous authority provisions of the Consumer Finance Association s Lending Code for Small Cash Advances We would encourage the FCA to work with code administrators to identify the areas that can most effectively be brought into a rulebook and those, which while examples of good practice, would be difficult to bring in owing to the requirements of the CCD. In the longer term we would encourage the FCA to maintain a dialogue with the regulated sector on industry codes and bring areas of emerging good practice into the rule-book as appropriate. We see the more flexible approach to rule-making that the FCA can take as a key benefit of the new regime. Q17. Do you agree with the different standards that we propose to apply to different types of debt advice? We take great comfort from the view expressed that the FCA will expect all regulated advice to be high quality and we agree that both profit-seeking and not-for-profits providers should be subject to comprehensive COB rules where they are advising borrowers to enter particular debt solutions. It will be important for the FCA to ensure that the plans of the Accountant in Bankruptcy are fully aligned with the FCA s approach as it seeks to make progress on bankruptcy law reform in Scotland. The proposed approach to standards links well with our role to work with partners to improve the quality of debt advice and, as noted in points made elsewhere, we believe the standards framework we are finalising should be formally incorporated into the new regime as a requirement on all debt advice providers. Q18: Do you agree with our proposed approach to applying client asset rules to debt management firms? We believe the application of more rigorous client asset rules to debt management firms is an excellent step and we believe they should also be applied to not-for-profit bodies conducting debt management activity. Further, we believe that not-for-profit bodies should also be required to have an individual responsibility for protecting clients money and assets.

6 Similar to our answer to question 11, we do not believe this would be overly burdensome to not-forprofit bodies operating in this area owing to existing requirements. Q20. Do you agree with our proposed approach to authorised firms which outsource the tracing of debtors to third party tracing agents? We support the proposed approach and would encourage the FCA to reassure itself through its supervision that when mistakes are made by third party tracing agents there are simple mechanisms by which these can be resolved by individuals who may have been wrongly identified as liable for a debt. Q23: Do you have any comments regarding our proposed approach to complaints and redress? We believe that an opt-in to FOS jurisdiction for not-for-profit debt advice providers is likely to lead to uncertainty for over-indebted people and should be reconsidered. We would also expect that in order to demonstrate best practice the majority of not-for-profit advice providers will opt-in. We are not convinced that there is a new financial risk present here given both historic levels of complaints about the not-for-profit sector and existing responsibilities towards clients that tend to be covered by professional indemnity insurance. However it may be worth either extending the free case limit for not-for-profit providers or exploring another method to limit the FOS fees payable by not-for-profit providers were they to opt-in. Q30. Do you agree with our initial assessment of the impacts of our proposals on the protected groups? Are there any others we should consider? We welcome the acknowledgement in the equality impact assessment that a number of the protected groups feature disproportionately within the over-indebted population. This should have implications for the supervisory approach that is taken to debt advice providers as well as that which is taken to lenders. We welcome the aim to write the OFT s mental capacity guidance into FCA rules and we encourage the FCA to reflect with relevant stakeholders on how the needs of groups they represent can best be served in the new regime.

7 To discuss further please contact: Colin Kinloch Debt advice policy manager Tel: Published: May 2013 The Money Advice Service Holborn Centre 120 Holborn London EC1N 2TD Tel: Contact: