CPA Audit LLP, Talbot House, 8-9 Talbot Court, London EC3V 0BP Telephone: 020 7621 9010 Facsimile: 020 7621 9011 email: info@cpaaudit.co.uk web: www.cpaaudit.co.uk Details of FCA Consumer Credit Regime (13/29) 14 October 2013 Introduction Following our Regulatory Bulletin on Regulation of Consumer Credit is Changing: Are You Ready? (13/26), the FCA has published another Consultation Paper with the detailed proposals of its consumer credit regime. As mentioned in its last Consultation Paper, the FCA will provide an interim permission regime which will ensure firms can take simple steps to continue their consumer credit activities after the 1 st April 2014. Current consumer credit licences from the OFT will expire on 31 st March 2014. If a firm currently holding a licence wants to continue carrying out consumer credit activities from the 1 st April 2014, it must have registered for an interim permission from the FCA. From 1 April 2014 the FCA will make available the forms firms need to become fully authorised. Moreover, the appointed representative regime will also be available to consumer credit firms. Two-tier approach The FCA proposes to take a two-tier approach that differentiates between higher-risk and lower-risk consumer credit activities. The lower-risk activities include: consumer credit lending where their main business is selling goods and non-financial services and there is no interest or charges; consumer hire; credit broking; not-for-profit debt counselling and debt adjusting; and not-for-profit credit information services. The higher-risk activities include: consumer credit lending including personal loans, credit card lending, overdrafts, pawnbroking, hire purchase, conditional sales etc. credit brokerage; debt adjusting; debt counseling; debt collection; debt administration; credit information services; credit reference agency; and peer-to-peer lending. A key difference between these two groups is that firms carrying on lower-risk activities will only CPA Audit is a trading name of CPA Audit LLP, a Limited Liability Partnership registered in England and Wales. Partnership number: OC314819. Registered office: Talbot House, 8-9 Talbot Court, London EC3V 0BP
be able to apply for a limited permission, instead of full authorisation. In addition, these firms will be asked to supply less information to the FCA than firms requiring full authorisation, and will be subject to reduced approved person regime requirements. Approved persons regime The FCA is also proposing the following changes to the approved persons requirements to consumer credit firms: not-for-profit providers of debt advice that hold 1 million or more of client money will need to have a director or senior manager approved to carry out the client asset operational oversight function; profit-seeking debt management firms will only need to have a director or senior manager approved to carry out client asset operational oversight if the firm holds 1 million or more of client money; smaller profit-seeking debt management firms and not-for-profit providers of debt advice (holding less than 1 million of client money) will need a director or senior manager to be responsible for overseeing the firm s holding of client assets. in the case of profit seeking debt management firms, this person must be someone who has been approved for a significant influence function ; authorised firms whose main activity is not a regulated credit activity (apart from firms with limited permissions) will need to have approved persons to carry out significant influence functions including the governing functions ; the CF30 customer function is not applicable to any consumer credit activity; and other simplified approved person requirements for sole traders. Reporting requirements The FCA s reporting requirements will come into effect on the 1 st October 2014 and will only apply to firms that are fully authorised (i.e. firms carrying on higher-risk activities). The FCA will not regularly collect data from firms with interim permission, but will ask for information from individual firms when required. The reporting frequency will depend on the size of the firm, being either annual or six-monthly, and aligned to a firm s financial year end. The FCA proposes that firms generating income of more than 5 million per year should report their data every six months. Firms will be required to submit their data through the GABRIEL electronic reporting system. The reporting regime consists of two components regulatory reporting and product sales data reporting (PSD). Product sales data relates to specific details about each individual sale of a particular type of product. The FCA has already been collecting PSD on mortgages, investment and insurance products, and it proposes to do the same for certain consumer credit products. The PSD requirements will come into effect on the 1 st October 2014 and will apply to firms that are fully authorised to enter into a regulated credit agreement as a lender of high cost short-term credit and home collected credit. Firms carrying out consumer credit activities will not be required to submit close links or controllers reports unless they are already required to do so.
The GABRIEL regulatory reporting forms that will apply to consumer credit firms include: CCR001: Financial data CCR002: Volumes CCR003: Lenders CCR004: Debt management CCR005: Client money and assets CCR006: Debt collection CCR007: Key data Firm classification Consumer credit firms will follow the same FCA firm classification model that is applied to all regulated firms. Firms will fall into one of four conduct categories: C1, C2, C3 or C4. C1 and C2 firms will be classed as fixed portfolio, which means they will have a dedicated supervisor. C3 and C4 firms will be classed as flexible portfolio, which means they will be supervised by a team of sector specialists and not have a dedicated supervisor. Financial crime and protecting customers All consumer credit firms must comply with legal and regulatory obligations to deter and detect financial crime. This includes money laundering. The FCA requires all consumer credit firms to establish and maintain appropriate and risk-sensitive policies and procedures to reduce the risk that they may be used to further financial crime. Where a promotion for consumer credit does not meet the requirements, the FCA will have all the same disciplinary tools for firms who currently breach the financial promotions rules. It can ask the firm to amend or withdraw the promotion, or provide a formal attestation of effective governance for the approval of compliant financial promotions. In cases where the firm does not co-operate, the FCA can issue a supervisory notice banning the promotion and may even take enforcement action in the worst cases. Where the FCA sees unfair terms in standard consumer contracts, it can apply for an injunction to prevent a firm relying on unfair terms under the Unfair Terms in Consumer Contracts Regulations 1999. New sourcebook for conduct standards The FCA has created a new sourcebook the Consumer Credit sourcebook (CONC), which will include both the conduct requirements for consumer credit firms, and the prudential requirements for debt management firms. The content of CONC will consist of: rules and guidance which reflect provisions of the Consumer Credit Act and its secondary legislation; OFT guidance, that will be carried across as either rules or guidance; new rules applying to peer-to-peer lending and high cost short-term credit as below; and other material from existing industry codes. The draft CONC Handbook rules are contained in Appendix 2 of the Consultation Paper
Rules for high cost short-term credit High-cost short-term credit is defined as: a regulated credit agreement: which is a borrower-lender agreement or a peer-to-peer agreement; in relation to which the APR is equal to or exceeds 100%; either: o in relation to which a financial promotion indicates (by express words or otherwise) that the credit is to be provided for any period up to a maximum of 12 months or otherwise indicates (by express words or otherwise) that the credit is to be provided for a short term; or o under which the credit is due to be repaid or substantially repaid within a maximum of 12 months of the date on which the credit is advanced; which is not secured by a mortgage, charge or pledge; and which is not a home credit loan agreement, a bill of sale loan agreement or a borrowerlender agreement enabling a borrower to overdraw on a current account or arising where the holder of a current account overdraws on the account without a pre-arranged overdraft or exceeds a pre-arranged overdraft limit. New rules that only apply to high-cost short-term credit lenders include: limiting the number of times a high-cost short-term credit loan can be rolled over to two; introducing a limit of two unsuccessful attempts on the use of Continuous Payment Authority (CPA) to pay off a loan and a ban on part payments; requiring a risk warning on all high-cost short-term credit adverts, which will come within the financial promotions rules; and requiring high-cost short-term credit providers to provide an information sheet, including information on free debt advice, before a loan is rolled over. The OFT compliance review indicates that some firms business models are based on making money from rollovers and default charges. Therefore, the FCA proposes to include adequate affordability assessments into its rules. The rules will require lenders to consider the customer s ability to repay the loan and the potential for the loan to have an adverse impact on the consumer s financial situation. Furthermore, the rules will mean that loans can only be extended where the customer has agreed to the extension and only after the lender is satisfied that it is in the customer s best interest to do so. These rules will apply to all regulated credit lending. The FCA also proposes to introduce a limit of two unsuccessful attempts on the use of CPAs to pay off a loan, as it believes that CPA repayments encourage insufficient affordability assessments and the unfair treatment of customers experiencing difficulties. The FCA will also ban the use of CPA to take part payments. This will reduce the potential harm caused to consumers by numerous part-payment attempts that take any funds available in borrowers accounts. Currently, adverts for payday loans are not required to provide a risk warning about taking out a loan. Of those that do have to include pricing information, there is no warning about the particular risk associated with rollovers. This has become a significant concern for the FCA. Therefore, the
FCA proposes that all financial promotions for high-cost short-term loans will need to carry a risk warning and the risk warning must be displayed in a prominent way. Under the Consumer Credit Act, lenders are currently required to provide customers in arrears and in default with information, including on sources of free debt advice. However, many customers who could benefit from this information do not go into default because they roll over their loan instead, so the effectiveness of this policy is limited. The FCA proposes to introduce a new rule to require lenders to provide customers with this information before their loan is rolled over. As with the risk warning, this should help some consumers make more informed decisions, in this instance about managing their debt. Peer-to-peer lending and third party agents The Government has decided to make operating an electronic system in relation to lending a new regulated activity. The FCA also agrees that individuals and relevant persons that lend or borrow through a peer-to-peer platform should be appropriately protected. The FCA will publish a separate consultation paper on the regulation of crowd-funding including the lending/investment aspects of peer-to-peer lending. Third parties that trace borrowers who owe debts arising from consumer credit agreements or consumer hire agreements, but do not carry on any other regulated activity (including taking any other steps to collect debts), will be exempt from needing to be FCA-authorised or appointed representatives. The authorised firm (likely to be a lender or a debt collector) that outsources the tracing to the third-party would be held directly responsible by the FCA for the carrying on of that activity by the third-party tracing agent. Prudential standards The proposed prudential requirement will apply to both debt management firms and not-for-profit debt advice bodies that, at any point in the last 12 months, have held 1 million or more in client money, or as the case may be, expect to hold 1million or more in client money over the next 12 months. Firms with interim permissions will not be subject to the prudential standards. They will only apply once the firm has become fully authorised. The prudential requirement for these firms will be the higher of: a fixed minimum amount of 5,000, or a percentage of a volume-based measure which is 0.25% of the total value of relevant debts under management outstanding. Relevant debts under management will be the debts in relation to the activity of debt adjusting and will not include debt adjusting where the firm is exempt. Firms will need to calculate the volumebased measure annually on a firm s accounting reference date at its financial year end, and it will cover the total relevant outstanding amount that a debt management firm s clients owe to their creditors. Firms are also required to recalculate their prudential requirement if the value of their relevant debts under management outstanding increases by more than15% and to notify the FCA of any
significant change in that requirement, to ensure its prudential requirements is always up-to-date and accurate. Client money requirements All debt management firms holding client money would be required to have an annual audit, carried out by an independent external auditor, on how they comply with client money requirements. The results of the audit must be given to the FCA within four months of the firm s accounting year end. Firms must keep records that make it possible to distinguish the money they hold for one client from money held for another and from the firm s own money. Firms must update their records within five business days of receiving any client money. Firms are also required to keep records of all the money they have paid to creditors and records of any verbal communication the firms have had with their clients and the clients creditors. The proposal requires firms to obtain a letter from every bank they use to deposit client money, in which the bank acknowledges that it will keep the firm s money separate from its clients and that the bank has no right to use client money to cover any money a firm might owe to the bank. The FCA has produced a letter template that firms can use to request this from a bank. Consumer credit firms are also required to perform regular reconciliation to ensure records are accurate and keep an up-to-date CASS resolution pack a master document that would help an insolvency practitioner to find useful and necessary information about a firm s business and its senior personnel if the firm fails. Appointed representatives of debt management firms are allowed to handle client money in the form of cash or cheques, as long as they pay them into an authorised firm s client money bank account within one business day of receiving them. They will not, however, be permitted to hold client money in their own bank accounts and must instead have processes whereby any automated payments are made by their client directly to an authorised firm s client money bank account. The FCA proposes to classify the firms holding client money into large and small firms with the threshold of 1 million. So that a firm that held over 1 million at any point during the previous calendar year or projects to do so in the current year will be categorised as a large firm. A firm with client money holdings below 1m would be a small firm. FCA requires large firms to choose appropriate banks to segregate client money and make sure that they do not deposit too much client money with any one bank and to make records of their decisions including the rationale for doing so. Complaints and Ombudsman services The ombudsman service currently has three jurisdictions under which it can consider consumer complaints: Compulsory Jurisdiction (CJ); Voluntary Jurisdiction (VJ); and Consumer Credit Jurisdiction (CCJ). When the regulation of consumer credit is transferred to the FCA, all consumer credit activities will
be covered by the CJ, like other regulated activities, and the CCJ will be abolished. The FCA proposes that from the 1 st April 2014 consumer credit firms that have not to date been FSMA authorised will need to record every complaint they receive, including how they resolved it, and keep the record for three years. Consumer credit firms that are FSMA authorised are already subject to these requirements. In the Consultation Paper, the FCA provides specific information on how often firms should report and publish complaints, based on the activities they carry out. However, the requirements will not apply to: Next steps consumer credit firms with only an interim permission credit related regulated activities of existing FSMA-authorised firms with only an interim variation of permission. Until they have obtained a full variation of permission, these firms will continue to report and publish complaints in accordance with current requirements Consultation period will end on the 3 rd December 2013. The FCA will then review all the responses and publish a policy statement in February 2014, ahead of the transfer of consumer credit regulation from the Office of Fair Trading (OFT) on the 1 st April 2014. The policy statement will include final rules and guidance and Handbook material. The full FCA Consultation Paper can be found here. As always if you have queries please contact any member of CPA compliance team. CPA Audit LLP. First edition, 10/13