Response to SRA Consultation on regulation of consumer credit activities

The Law Society s response to the SRA s consultation on regulation of consumer credit activities Summary The Solicitors Regulation Authority (SRA) is proposing that it ceases being a Designated Professional Body (DPB) in relation to consumer credit activity. The effect of this is that firms undertaking any regulated consumer credit activity will be required to seek authorisation direct from the Financial Conduct Authority [FCA]. The SRA suggests this on the grounds that: It lacks the capability and capacity to implement the changes needed to be compliant with the FCA's method of regulation under the new regime; The regulatory approach taken by the FCA is significantly at odds with the SRA s own Outcomes Focused approach; and Most prudent firms would register with the FCA in any case because of the uncertainties of the Part 20 exemption regime. The Law Society opposes the SRA's proposal because: It is right in principle and in the interests of consumers that the regulation of solicitors should, so far as possible, sit with a single regulator; The number of firms likely to be affected by the proposals is significantly greater than that suggested by the SRA; The change will create significant additional costs and burdens for the profession; Firms may simply decide not to undertake particular types of work or to structure their business practices in order to avoid the need to register with the FCA, which could result in a reduction in the range of advice and services available to consumers; We understand from discussions with the FCA that there may be greater flexibility for the SRA to continue to regulate as a DPB in line with its approach to outcomes focused regulation than had previously been thought; There has been no indication of the extent of the costs to the SRA but we consider that these could be reduced following discussions with the FCA and, in any case, are likely to be less costly to the profession than the process of dealing with the FCA; Fuller impact assessment of the proposals needs to be undertaken. In particular, we consider, that the full extent of the work that would be caught needs to be considered; The SRA has not paid adequate attention to the Regulatory Objectives under the Legal Services Act 2007 and the Regulators Code; and There are pre-existing problems for the advice sector which the SRA proposal will highlight. General observations 1

Before responding to the individual questions posed in the consultation, we would make the following points. It is important to note that the SRA appears to have been regulating the work of solicitors in this area effectively. Indeed, for the 37 years that the original group licence regime operated 1, the Society is aware of only one case, at the end of the life of that regime, which required action. The sort of work that solicitors undertake in this field is relatively low risk to consumers and, generally, is not their main function. The concerns that gave rise to the FSMA 2000 are of limited application to solicitors. Solicitors do not undertake consumer credit work in isolation or as a separate business. The work, as we outline below is integral to many firms as part either of the service that they offer to clients or to run their own businesses. It will obviously cause cost and confusion if firms have to answer to two different regulators without any obvious benefit to the public. For these reasons we believe that it is right that the SRA should be the regulator for this work. The extent of consumer credit work within the profession It appears to us that a very significant number of firms will be required, or be prudent, to register with the FCA if the SRA decides to cease to regulate this work. This is unsatisfactory: the SRA needs to be more certain of the actual impact of these proposed changes and to advise its regulated community of the need, or not, to apply for FCA authorisation. It is not right that firms should be expected to incur additional regulatory costs and burden on a purely speculative basis and when it might not actually be required. In its consultation paper, the SRA sets out those areas of work undertaken by firms that it thought would be activities requiring FCA authorisation, should the consultation proposal be implemented. These include: Credit brokerage; Debt-adjusting; Debt-counselling; Debt-collecting; Debt administration. The Law Society is concerned that, in fact, the impact will be broader than this and that other activities could be captured because of the wide range of activities under the remit of the FCA. These areas include: Disbursement funding arrangements which could be construed as credit brokering and require FCA authorisation; Cases funded through a conditional fee agreement or a damages based agreement, which may involve the firm itself funding disbursements and, indeed, offering credit for its own fees or brokering an insurance policy to cover the disbursements and the other sides costs in the event of failure; 1 Under the Consumer Credit Act 1974 and operated by the OFT, the Law Society, latterly through the SRA, held a Group Licence on behalf of the profession to enable them to regulate firms undertaking these activities. 2

Matrimonial work, where it is common for firms to arrange loans for the party without funds but who may be occupying the matrimonial home, to cover their costs pending liquidation of the assets and obtaining funds; Staged fee arrangements, which could mean that the majority of firms would require FCA authorisation and regulation. Recent advice received by the Society suggests that this will indeed be the case; Pre-Issue Work, where it is unclear, particularly from advice recently received by the Society, whether or not firms could benefit from the contentious business exemption when undertaking pre issue work; Conveyancing, particularly for firms that undertake both insurance mediation work and activities which might be deemed consumer credit-related. Currently, firms enjoy an exemption for the need for FCA regulation by the SRA s registration as an Exempt Professional Body for insurance mediation work. Should they however be captured for FCA regulation by virtue of activities deemed to be consumer credit-related, they would have to be regulated both for the consumer credit activity 2 and the insurance mediation work; Investment work, including dealing in investments as agent, arranging deals in investments, and safeguarding and administering investments, would also be caught, if, as above, firms are undertaking this work alongside consumer credit activity. This suggests a significantly greater impact than the SRA has indicated. If this is correct, it suggests that firms will have to absorb the costs of being registered with the FCA which will lead to increased costs for consumers and a further burden on solicitors as businesses. Alternatively, firms will decide not to undertake work or offer facilities for clients, which is likely to have an adverse effect on access to justice. Discussion with the FCA The Society has held some initial discussions with the FCA. We understand that the FCA, while agreeing that its rule book is an important base for regulation of this work, recognises that different regulators deal with providers in different circumstances and have different regulatory approaches. The FCA did not appear to demand that the SRA should take over its complete approach and appears willing to discuss more flexible arrangements. We urge the SRA to enter into discussions about this as a matter of urgency. Regulatory objectives In this constext, we would remind the SRA of the Regulatory Objectives under the Legal Services Act 2007 and of the Regulators' Code 3. It appears to us that the SRA s proposals conflict with the following objectives: Protecting and promoting the public interest. The SRA itself states, (paragraph 47 of the Consultation Paper) that its proposals: 2 i.e.: activities falling within the definitions of debt counselling and debt adjusting carried out in relation to domestic conveyancing 3 Department for Business Innovation & Skills Better Regulation Delivery Office Regulators' Code. April 2014. 3

" might mean that some consumers are unable to access consumer credit services that they have relied upon in the past. It is possible that the impact will have a disproportionate impact on vulnerable consumers". If, as we suggest the impact is likely to be greater than the SRA has estimated, we find it hard to see how a reduction in the supply of legal services within consumer credit law, along with a likely increase in costs for consumers purchasing legal services within this area supports this objective. Improving access to justice. This has been dealt with above but it is important also to note that it would be erroneous to assume that the slack caused by this reduction would be picked up by the not-for-profit sector. There are already clear indications that because of the new consumer credit regime it is more difficult for consumers to access pro-bono advice in the relevant area of law. Protecting and promoting the interests of consumers. A likely increase in costs and reduction in services does not appear to us to be in the consumer interest. Principles of Good Regulation. It appears to us that the SRA s proposals conflict with these principles and with those in the Regulators Code, particularly because they: o o o Are not proportionate or targeted; Will not assist the profession to grow; and Are not based on risk. The Advice Sector We are particularly concerned about that the proposal will serve to highlight the preexisting problems for the Advice Sector, at a time when it is already facing particular demands. The FCA has confirmed that solicitors can benefit from the Part 20 regime and undertake pro bono work. However, it would appear that no account of pro bono work was taken by the SRA in the run up to this consultation. Since the introduction of the new regime on 1 April 2014, pro bono advice clinics previously benefitting from the Group licence regime (but not covered by FCA limited permission authorisation by virtue of having Law Centre or Citizens Advice Bureau status) have had to stop providing debt advice. We are advised by LawWorks 4 that a considerable number of their long-standing, free debt advice services for vulnerable consumers are on hold. 5 LawWorks has itself stated that "the removal of this service is counterintuitive to legislation designed to protect the consumer". This unwelcome development occurs within the context of a dramatic overall reduction in organisations offering free legal advice following progressive cuts made by Government. The Law Centres Network website lists only 44 Law Centres operating throughout the UK and many Citizens Advice Bureaux are closing or merging 6. It should also be noted that the Law Centres Network and Citizens Advice 4 http://www.lawworks.org.uk/: the Solicitors Pro Bono Group 5 There has been a reduction of clinics that do offer debt advice from 78 to 61. 6 Independent on Sunday (September 2014) 137 CABs have folded in the past 10 years. It is noteworthy, for example that those consumers living in and around Manchester are currently without a Law Centre and CAB services in Manchester are threatened with closure 4

Bureau are only able to provide a reduced range of services under the new regime. Prior to 1 April 2014., it was possible to offer advice in 7 areas (consumer credit, credit brokerage, debt adjusting, debt counselling, debt collecting, debt adjusting and provision of credit information services) but the new limited permission regime allows pro bono advice to be provided only in the areas of debt counselling, debt adjusting and/or credit information services. Furthermore, it is believed that many firms will not apply for individual authorisation in respect of their pro bono work where they do not specialise in consumer credit and debt advice. In addition, as a result of uncertainty around the legislation and the penalties for breaches of FCA regulation, solicitors are understandably cautious about providing debt advice at clinics if they are unsure about which areas are and are not covered. Certainly clarification is required that the exemptions covered extend to issues incidental to the particular service provided to clinic clients. It would seem inevitable therefore that there will be a body of consumers who, as a direct result of the SRA proposal, will no longer be able to afford or access consumer credit or debt advice. Responses to Specific Consultation Questions Question 1: Do you agree with the proposal that firms carrying on any regulated consumer credit activities should be required to seek authorisation directly from the FCA and not be able to rely on the Part 20 exemption set out in FSMA? We do not agree with this proposal because: 1. It will lead to dual regulation with all its associated issues. The bulk of consumer credit work undertaken by solicitors is inseparable from their role as solicitors and it is right that this should be regulated in one place by the SRA; 2. It will increase the burden on firms that will ultimately be passed on to the consumer; 3. There remains significant uncertainty about the impact on firms and on their clients and while this exists it would be wrong to take such an important decision; and 4. There could be alternative solutions to this regulatory issue. We believe that all possible steps should be taken with the FCA to find a way of enabling the SRA to remain a DPB and regulate firms for this activity. Dual Regulation The SRA has previously acknowledged in relation to the changes in this area of regulation that they could lead to a significant increase in the number of firms subject as a result of Manchester City Council ceasing all funding for advice services currently delivered by Manchester Citizens Advice Bureau and Cheetham Hill Advice Centre. 5

to dual regulation, leading to increased burden and costs for those firms and that this would ultimately be met by clients. In its application to the Legal Services Board seeking approval for the rule changes which enabled the current transitional period 7, the SRA has also said: We believe that creating rules which facilitate the transfer of regulation of consumer credit activities would be consistent with our approach to regulation. The Society believes that it would be clearer and a more proportionate regulatory burden for the SRA to remain a DPB and regulate firms for consumer credit-related work. Increased burden We do know that the effect of the SRA withdrawing from the Designated Public Body regime under Part 20, would be that from 1 April 2015 firms would no longer be able to take advantage of the transitional provisions in the SRA Financial Services (Scope) Rules 2001 (Scope Rules) which broadly replicate the exemptions under that Part and would have to seek FCA authorisation to undertake regulated consumer credit activity. We strongly suspect that the burden on businesses of this dual regulation will be considerable, both in terms of compliance requirements and costs. Firms would have to pay an application fee when they apply to be authorised and thereafter be required to pay an annual fee. The SRA has itself acknowledged this burden (paragraph 46 of the Consultation Paper). Firms would also have to factor in the time taken by the FCA to process applications, particularly at the outset of this regime. The FCA undertakes to make a decision on complete applications within 6 months. If an application is incomplete, the FCA decision may take 12 months. Should the scope of regulation indeed be broad and capture a large number of firms, this also raises the further risk that the FCA will be adversely affected by the sheer volume of applications it receives. As a result of the above, some firms may withdraw from consumer credit work which would diminish consumer choice and access to justice. It may well be that the SRA will need to undertake additional work. However, this has not been quantified and, as has been suggested above, it is likely that discussions with the FCA could reduce this significantly. The SRA has been regulating satisfactorily under the previous regime and that should prove a good starting point. In any case, we would prefer that the SRA were to take this role with any additional costs than for firms to be subject themselves to what are likely to be substantially greater costs in terms both of money and of time, in dealing with a separate regulator. Uncertainty and Impact We recognise that there is considerable uncertainty about what activities will require solicitors to be regulated by the FCA under these proposals. This is an area where certainty is required given that solicitors may be committing a criminal offence if they carry out the work and fail to register. We have already set out the more problematic areas which include: 7 6

fee arrangements where payment is deferred through instalment arrangements or, for example, because the agreement is a CFA; the definition of incidental or complementary work and whether firms could benefit from the related exclusion from FCA regulation; and work done prior to the issue of proceedings. If, as seems likely, these areas are covered, the number of firms affected will be significant. The SRA consultation paper estimates round 1,100 SRA-authorised firms around 10% of the total are involved in debt collection work. The Law Society questions whether the figures relating to effect present a realistic picture. The Society has undertaken an informal data exercise and believes that at least 1,834 private practice firms derive at least some of their turnover from: Financial advice areas ( Consumer, debt collection, insolvency & bankruptcy, Financial advice regulated- SRA, Financial advice regulated FSA); and Insurance mediation areas (Property- Residential, Family matrimonial). This represents 19% of all firms, which is significantly more than the SRA estimate. If the SRA proposal was implemented, conveyancing firms undertaking both insurance mediation work and consumer credit regulated activity would be required to be authorised by the FCA in relation to both activities. Firms may not operate under authorisation in respect of one area of work whilst benefitting from exemption in a different area, a factor which needs to be considered as part of the impact assessment. Moreover, if fee arrangements are also included, the number of firms affected would rise substantially. The costs of additional regulation will hit small firms, including those involving BAME practitioners, most significantly. These are also the firms that tend to serve vulnerable clients. In addition to looking at the numbers of firms, we urge the SRA to assess the size of firms involved, as well as the effect on diversity within the profession. Vulnerable Consumers We note in particular the following statement in the consultation (paragraph 47): "It is possible that the impact will have a disproportionate impact on vulnerable consumers, although we have no evidence to quantify this impact. However, an impact assessment will, be completed before a final decision is taken." We agree that this is likely and urge the SRA to ensure that the interests of vulnerable consumers are fully considered. It provides a very strong reason for the SRA to continue to regulate in this area. It is important to note in this context that, with the end of legal aid for much matrimonial work, firms are increasingly providing credit for clients pending resolution 7

of the couple s financial affairs (for example, the sale of a house). If a firm decides that it is not willing to seek regulation by the FCA then such arrangements would cease and this would cause potentially vulnerable clients significant difficulties in gaining access to justice. Clients who naturally gravitate towards pro-bono clinics are some of the most vulnerable members of society. LawWorks reports that 75% of its clinic clients fall below the Joseph Rowntree Foundation's socially acceptable minimum standard of income. Question 2: If you do not agree with the proposal, please offer any alternative suggestions for ensuring that the SRA's regulatory arrangements in relation to consumer credit activities are targeted, proportionate and do not result in the incorporation of the FCA's CONC and do not impose unnecessary costs and regulatory burdens on firms. Having held discussions with the FCA, it appears to us that they would be willing to discuss ways in which the SRA could regulate without causing the difficulty that it has identified and to ensure that the outcome is proportionate. If this is the case, the extra costs envisaged by the SRA in order to fit with FCA-style regulation (as it says at paragraph 41 of the consultation paper), largely fall away. We would urge the SRA and FCA to discuss the issues with a view to reaching an agreement which enables the SRA to continue to regulate firms undertaking this work proportionately. The Society is also keen to work with the SRA, the FCA and Government to assess how far secondary legislation could address the lack of clarity in this area. We would, however, stress that, even if secondary legislation is achievable, this is an area which it is right that the SRA should continue to regulate. Finally, we would say that we consider that the regulatory costs to firms of the SRA taking on this work are likely to be less than the costs of dealing with the FCA. Question 3. Do you have any views about our assessment of the impact of these changes and, are there any impacts, available data or evidence that we should consider in finalising our impact assessment? The Law Society is not aware that any formal impact assessment has been undertaken by the SRA with regard to this proposal. We cannot therefore comment substantively on the SRA's assessment of the impact of the changes until such an assessment has taken place. We have dealt with the likely impacts in our general observations and our answer to the first question. We would reiterate that: The number of firms affected is likely to be significantly greater than the SRA has suggested; The supply of lawyers working in consumer credit law may fall; Vulnerable consumers may be unable to access timely debt advice, particularly as pro bono clinics are not well placed to pick up the slack; The facilities offered by firms to clients may be reduced; Costs to the consumer may be increased; and 8

The public's awareness that accessing legal assistance on debt relief is a possibility may be reduced. The SRA s proposal to cease to hold Designated Professional Body status will therefore have a significant impact on a number of firms. The additional cost and work burden imposed on these firms will be hugely damaging. The loss of the Part 20 exemptions will be particularly damaging. Question 4. To what extent are firms providing consumer credit services to clients which would mean that they would need to seek authorisation from the FCA? Are consumer credit arrangements more likely to be offered for particular types of work? We have suggested above that the SRA s analysis under-estimates the work that firms do in this area and that there are significant areas in respect of litigation funding, fee arrangements and conveyancing which may well require authorisation. Question 5. To what extent are firms providing other FSMA regulated activities which would mean that they would need to seek authorisation from the FCA? We understand this question to ask whether firms are undertaking work which would need authorisation from the FCA even if the SRA continued to regulate consumer credit. We do not have evidence about this. However, our understanding is that the number of firms currently needing to be directly regulated by the FCA is very small. Question 6. If the proposal is implemented, will firms continue to provide consumer credit services, regulated by the FCA? The Society only has anecdotal evidence which would indicate that the numbers of firms that would discontinue providing consumer credit services could be significant. It is inevitable that firms are likely to look at alternative approaches to avoid the need for regulation by the SRA which may well lead to them deciding to cease providing particular services. We would urge the SRA to engage with the profession as widely as possible to determine the likely attrition rate from working in this area of law in the event that the SRA implements its proposal. 9