Financial Regulation: An overview of the FCA s proposal of the new Consumer Credit regime October 2013
Consultation Paper 13/10: Detailed Proposals for the FCA regime for Consumer Credit In early October 2013 the Financial Conduct Authority ( FCA ) published its latest consultation paper ( CP13/10 ) in advance of it taking over the regulation of the consumer credit industry from the Office of Fair Trading ( OFT ) on 1 April 2014. The consultation paper sets out detailed proposals for its new consumer credit regime. The consultation is open until 3 December 2013 and the FCA will publish its final rules and guidance in February 2014. This briefing tracks the status and development of the reforms to the consumer credit regime and summarises some of the key changes being proposed. Who should read this briefing? Firms that currently hold individual or group credit licences issued by the OFT under the Consumer Credit Act 1974 ( CCA ) Firms that are considering carrying out consumer credit activities Operators of peer-to-peer platforms Not-for-profit bodies providing debt counselling, debt adjusting and credit information services. Summary of what firms can expect: From 1 April 2014 all firms that carry on regulated consumer credit activities will be regulated by the FCA An interim permission regime: Licence holders will need to notify the FCA that they want an interim permission to continue to carry on regulated consumer credit activities after 1 April 2014. All licence holders will need to be fully authorised by 2016 Increased scrutiny and pro-active supervision and enforcement for firms engaged in higher risk activities OFT rules and guidance will be carried across so as not to impose further undue burden on firms Additional costs and burdens will be imposed only if they are proportionate to securing an appropriate degree of protection for consumers or to promoting effective competition in the interests of consumers A specific clamp down on the excesses of high-cost short-term credit (aka pay day lenders ). Background From 1 April 2014, all firms that carry on regulated consumer credit activities will be regulated by the FCA rather than the OFT. This transfer will result in the Financial Services and Markets Act 2000 ( FSMA ) replacing the provisions of the CCA that cover licensing and other aspects of the regulatory framework for consumer credit regulation. The change in regulation will see the FCA take on responsibility for more than 50,000 firms who have existing credit licences. The Government considered the current split in responsibility for consumer credit between the OFT and FCA to be a fundamental weakness to financial services regulation in the UK. Accordingly, the decision was made to bring consumer credit into the same regulatory regime as other retail financial services under the FCA, within a framework based on the model set out in FSMA, but tailored to the consumer credit sector. The proposed regime will allow the FCA to provide stronger protection and better outcomes for consumers than the existing OFT regime. Martin Wheatley, the FCA s chief executive said of the new regime: Our aim is to create a regime that protects consumers and allows businesses to operate. There is a balance to be struck here, and to make sure we get it right we want to hear from as many interested parties as possible. Scope and new regulatory framework The Government has aimed to keep the scope of the regulation broadly the same, including replicating existing exemptions under the CCA. However, it does plan to make some changes to the scope of the regime in certain areas, the most significant of which concerns the regulation of peer-to-peer ( P2P ) lending platforms. The regulatory framework for consumer credit activities will be made up of a combination of: FSMA and its secondary legislation (most notably the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended) ( RAO )) Retained provisions in the CCA and its retained secondary legislation Existing and new FCA rules and guidance. As part of the new regime the FCA will create a new sourcebook in their Handbook called the Consumer Credit sourcebook ( CONC ). This will include both the conduct requirements for consumer credit firms and the prudential requirements for debt management firms. 5802 1
Pinsent Masons Financial Regulation Interim permission regime Consumer credit licences from the OFT will expire on 31 March 2014. If a firm currently holding a licence wants to continue carrying out consumer credit activities from 1 April 2014, it must have registered for an interim permission from the FCA to do so legally. Firms which are already authorised by the FCA or PRA will not automatically be given an interim permission instead they still need to register for an interim variation of permission if they wish to continue their regulated consumer credit activities. Firms have been able to register for interim permission on the FCA website since September 2013. As part of the process a firm must pay a small fee: 150 for sole traders and 350 for all other firms. Firms that register before 30 November 2013 will receive a 30% discount on these fees. If a firm wants to carry out additional consumer credit activities during the interim permission period (that is, carry out activities for which it did not hold a CCA licence prior to 1 April 2014) it will need to apply for full FCA authorisation before it starts those activities and it will need to apply to the FCA to carry out all of its activities including those to which the interim permission applies. Third party tracing agents currently licensed by the OFT for debt recovery (only) will not be carrying out regulated activities from 1 April 2014, so there is no requirement on them to obtain interim permission. What requirements will apply to a firm with interim permission? From 1 April 2014 a firm with interim permission will be required to comply with a number of FCA requirements set out in the FCA Handbook. These include FCA requirements set out in: Principles for Businesses General Provisions Sourcebook ( GEN ) Senior Management Arrangements, Systems and Controls Sourcebook Supervision Manual CONC. Firms which are proposing to apply for interim permission should therefore be preparing their systems and controls to ensure that they will be able to comply with applicable FCA requirements from 1 April 2014. By way of example, from the 1 April 2014, firms will need to make the standard status disclosure in its letters to customers and electronic equivalents (as set out in GEN 4). To assist in delivering a smooth transition to the FCA s new consumer credit regime, the FCA will disapply the following requirements to firms which hold an interim permission: Approved persons requirements Prudential standards for debt management firms Client assets for debt management firms (including client asset operational oversight function approved person) Requirements relating to controllers Periodic reporting Complaints reporting and publication rules. 2
In addition, the FCA is proposing to introduce a six-month transitional period during which, if a firm is able to demonstrate that it acted in accordance with the old CCA requirements and OFT guidance, the FCA will not take action against it in relation to those corresponding new FCA rules that are substantially the same. Authorisation process From 1 April 2014, the FCA will make available the application forms which firms will need to complete to be fully authorised by the FCA. Authorisation will be required by all consumer credit firms by 1 April 2016. However, specific categories of firms may be set earlier deadlines by the FCA. To qualify for authorisation, a firm must be able to meet the requirements of the threshold conditions which include: Location of offices for UK incorporated firms, the mind and management of the firm must be in the UK Effective supervision the 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 the firm must demonstrate appropriate financial resources, nature and scale of the business and skills and experience of those managing the firm s affairs Suitability the firm must 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 the firm s strategy for doing business must be suitable for its regulated activities. The FCA is proposing a two tiered, risk based approach to authorisation of consumer credit firms, whereby the specific requirements necessary to meet the threshold conditions will vary depending on the risk posed to the consumer. Firms carrying out higher-risk activities will be subject to the more onerous requirements necessary to meet the FCA s threshold conditions. In contrast, those firms only carrying out lower-risk activities will be able to apply for limited permission and will only have to meet modified, lighter requirements to comply with the threshold conditions. Higher-risk activities vs lower-risk activities Those activities constituting higher-risk activities are: Consumer credit lending including personal loans, credit card lending, overdrafts, pawnbroking, hire purchase, conditional sales, etc. (excluding lending by sellers of goods and nonfinancial services where there is no interest or charges) Credit brokerage including introducing consumers to lenders, but excluding broking by sellers of goods and non-financial services as a secondary activity (unless the broking is carried on in a consumer s home on more than an occasional basis e.g. doubleglazing sellers selling credit to the consumer in their home) 3 5802
Pinsent Masons Financial Regulation Debt adjusting Debt counselling Debt collection Debt administration Credit information services Credit reference agency Peer-to-peer lending. Lower-risk activities will avoid these onerous requirements due to the reduced risk such businesses pose to the consumer. Lowerrisk firms will be subject to the limited permission regime which modifies the authorisation requirements in relation to effective supervision and available resources, not requiring the submission of a business model. Lower-risk activities (in the non-financial sector) include: Consumer credit lending where goods are non-financial services with no interest or charges Consumer hire such as by tool and car hire companies Secondary credit brokering where such brokering is secondary to a company s primary business Not-for-profit counselling such as the Citizens Advise Bureau Not-for-profit credit information services. After receiving its limited permission, a lower-risk activity firm will be subject to reduced on-going requirements such as firms will be required to supply less information to the FCA than firms requiring full authorisation, and will also be subject to reduced approved persons requirements. Approved persons requirements As noted earlier, a firm which only holds interim permission will not be subject to the approved person regime. Most lower-risk firms with limited permission will generally be required to have only one individual approved. This individual would be required to carry out the appointment and oversight function and must ensure that the significant business responsibilities are clearly and appropriately divided among the directors and the senior managers of the firm. They must also oversee the implementation and maintenance of appropriate systems and controls. Higher-risk firms with full authorisation will be required to have all individuals carrying out the following controlled functions pre-approved: Governing function those directing the firm s affairs (director, CEO, non-executive director) Appointment and oversight function as described earlier Compliance oversight function oversight of the firm s regulatory compliance (only applicable to debt management firms and credit repair firms) Money laundering reporting officer function oversight of the firm s money laundering reporting (only applicable to firm s that are covered by the Money Laundering Regulations 2007) Systems and controls function reporting to the governing body on compliance with its internal systems and controls Significant management function applies only to where significant responsibility is given to a senior manager or a relatively substantial business Protecting clients money and assets function oversight of the firm s client asset compliance. The FCA has indicated that the way it applies approved persons requirements to banks could change or be delayed as it further considers recommendations by the Parliamentary Commission on Banking Standards ( PCBS ). One of the PCBS s recommendations was that a new Senior Persons Regime and licensing regime should replace the approved persons regime for deposit-taking institutions. This means that the FCA may need to consult again on revised proposals. Alternatives to authorisation Two alternatives to becoming authorised are: 1. Being an appointed representative The Government has decided that becoming an appointed representative should be an option for most consumer credit firms but not for credit reference agencies. As an alternative to applying for authorisation, firms could opt for becoming an appointed representative of an authorised firm (its principal). This option should be a lower cost alternative to becoming authorised in its own right. However, a firm which only holds an interim permission will not be able to act as principal and appoint an appointed representative. 4
2. Being an exempt professional firm Under Part 20 of FSMA, the carrying on of certain FSMAregulated activities by members of designated professional bodies (DPBs) is exempt from the general prohibition and therefore not subject to full oversight under the FSMA regime (these firms are referred to as exempt professional firms ). Such activity is instead primarily regulated by the professional body to which member firms or organisations belong, under rules made by the professional body and approved by the FCA. Exempt professional firms, should be able to carry on certain consumer credit activities if their DPB puts appropriate rules and supervisory arrangements in place. Conduct of business requirements Requirements of CONC The proposed CONC Sourcebook sets out rules and guidance on a number of different areas applicable to consumer credit activities, including: financial promotions (CONC 3), pre-contractual disclosure (CONC 4), responsible lending (which includes explanations and assessments of creditworthiness) (CONC 5), post-contractual requirements (CONC 6), arrears, default and recovery (CONC 7). As well as the rules in CONC, specific OFT Guidance will remain in place as part of the FCA s rules, these include guidance on: Irresponsible lending (guidance for creditors), including an explanation of the credit agreement, assessment of affordability, pre-contractual issues and handling of default and arrears Unfair business practices in relation to credit broking Debt collection, including the use of tracing agents and continuing payment authorities Section 77-79 of CCA duty to give information to debtors and the consequences of non-compliance on the ability to enforce the credit agreement. High-cost short-term credit, including pay-day lending The FCA s proposals include requiring firms in the high-cost shortterm credit sector to: Assess the potential for a loan to adversely affect the customer s financial situation (which is a continuation of the current requirement under the CCA) Limit the number of times they can seek payment using a continuous payment authority Limit the number of times a loan can be rolled over Inform customers about sources of debt advice before refinancing a loan Put risk warnings on loan adverts. These proposals aim to ensure that firms only lend to borrowers who can afford it and also increase borrowers awareness of the costs and risks of borrowing unaffordably. Debt management The FCA proposes that the prudential requirement for all commercial debt management firms and for not-for-profit debt advice bodies (in certain circumstances) will be the higher of: 5,000, or 0.25% of relevant debts under management. The FCA proposes a transition period for its prudential rules and that all the rules will only become fully operational on 1 April 2017. The FCA is also proposing that debt management firms should spread their fees, segregate client money in ring fenced client bank accounts and obtain an acknowledgment letter from every bank used to deposit client money. The FCA has stated that the changes to the CASS rules will be delayed, which means that CASS will not apply to firms with an existing OFT licence and interim permission until they become fully authorised, which could be as late as 2016. In the interim, they must comply with the existing OFT guidance. For new entrants to the market however, the FCA is suggesting that firms are subject to the new rules immediately after they are authorised. Peer-to-peer lending platforms/crowd-funding Where a firm already holds a licence to conduct debt administration and meets the new criteria for the peer-to-peer regulated activity, they can apply for an interim permission. Operating an electronic system in relation to lending is going to become a regulated activity from 1 April 2014. A separate FCA consultation on crowd-funding including the lending aspects of peer-to-peer lending, has been published on 24 October 2013 (CP 13/13). We will be producing a separate briefing going through this consultation paper. Enforcement The FCA has stronger enforcement power than OFT and the FCA s Enforcement Guide and Decision Procedure and Penalties Manual (DEPP) will apply, as amended, to consumer credit related activities. With respect to the enforcement under the new regime, Martin Wheatley has said: Dedicated supervision and enforcement teams will crack down on poor practice, money laundering and unauthorised business. Firms that break the rules may face detailed investigations and tough fines. All firms proposing to carry out consumer credit activities after the 31 March 2014 should therefore carry out a thorough audit of the policies and procedures to ensure that they will be fully compliant with the FCA s new regime. The FCA intends to monitor this sector closely and has for the moment decided not to set a date in which these new rules will come into force. 5 5802
Pinsent Masons Financial Regulation FCA timeline for reforms Consultation paper on fees Consultation on the guidance on the new consumer credit regime Feedback on responses to the consultation paper on crowd funding Proposals for periodic fee rates for 2015/16 FCA paper on key risk and FCA priorities for intervention Consultation paper on crowd funding Consultation on changes to the handbook Policy statement on final rules for the new regime Final version of guidance on the new consumer credit regime October November December January February March April 2013 2014 For more information, please contact any of the following members of our Retail Financial Services team: Ian Roberts Partner T: +44 (0)20 7418 7139 M: +44 (0)7876 561562 E: ian.roberts@pinsentmasons.com Monica Gogna Partner T: +44 (0)20 7490 9695 M: +44 (0)7500 760840 E: monica.gogna@pinsentmasons.com Michael Isaacs Partner T: +44 (0)20 7490 6505 M: +44 (0)7747 790278 E: michael.isaacs@pinsentmasons.com John Verwey Senior Associate T: +44 (0)20 7490 6612 M: +44 (0)7747 860256 E: john.verwey@pinsentmasons.com Melanie Panzone Senior Associate T: +44 (0)20 7667 0187 M: +44 (0)7826 918225 E: melanie.panzone@pinsentmasons.com 6
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