New FCA online guidance aims to clarify the scope of the consumer credit regulatory regimesPrint publication
The Financial Conduct Authority (FCA) has recently sought to clarify the imminent changes to the regulatory regime governing consumer credit, by launching a series of web-pages highlighting the similarities and differences between the FCA regime and that currently operated by the Office of Fair Trading (OFT).
Whilst the full transfer of jurisdiction is expected to take place by March 2014, the FCA will only take over the OFT’s current responsibilities for the regulation of consumer credit from April 2014. After this date, the following activities will fall under FCA supervision:
- lending or brokering credit, whether or not secured on land
- being a credit reference agency or providing credit information services
- debt collection and debt administration services and
- carrying out activities in relation to contracts for the hire of goods.
The online guidance aims to provide clarity regarding some of the key features of the new regime, which is intended to make regulation simpler for both firms and consumers. Key changes include:
- The two separate activities of ‘credit brokerage’ (introducing individuals to businesses that are lenders or other credit brokers) and ‘credit intermediation’ (certain other activities to arrange a loan) are to be combined into a single ‘credit brokering’ activity, for which businesses will need to be authorised
- A new activity of ‘providing credit references’ will replace the current activity of operating a credit reference agency. However, only where this is a firm’s main business is it likely to meet the criteria which would mean that it is required to hold permission for the activity
- A firm will be categorised based on certain criteria, such as its size, number of customers and the perceived risk to consumers. The category a firm is placed in will determine the way it is supervised by the FCA and the intensity of this supervision
- However, all firms will be expected to comply with the FCA’s high-level principles, including having due regard to the interests of its customers and treating them fairly.
So what do the changes mean in practice and what can we expect of the new regime? Whilst the regime currently enforced by the OFT is based on detailed and prescriptive laws contained in statute and statutory instruments, the FCA regime will be predominantly rules-based, making it more flexible. One of the obvious disadvantages of a rules-based approach is less certainty and more frequent change. In particular, the FCA regime can be altered as and when needed, rather than any amendment having to go through Parliament.
At senior management levels, the FCA regime is also more onerous. Whilst both the OFT and FCA demand that those who run businesses are fit and proper to do so, the FCA has a separate ‘approved persons’ concept. This requires that those performing ‘controlled functions’ within an organisation, be it as directors or otherwise exercising compliance/operational oversight, are all subject to separate responsibilities and scrutiny.
Notably, the FCA has wider civil enforcement powers, including unlimited fines and restitution for actions found to have caused losses to consumers. The FCA can also:
- make temporary product intervention rules, so it can block an imminent product launch or stop an existing product from being offered further
- require firms to withdraw or amend misleading financial promotions with immediate effect
- publish details of the start of enforcement proceedings against a firm where there has been breaches of the rules or compliance failings and
- impose requirements on certain undertakings.
- Some of these give considerable power to the FCA in terms of the immediacy with which it can take action and the practical effect of its enforcement role. In last year’s ‘FCA Approach to Regulation’, it was promised that there would be stronger, earlier regulatory intervention and a more preventative, proactive approach to tackling risks to markets and consumers. The ‘new’ approach to enforcement is deliberately designed to avoid history repeating itself. It is no surprise, for example, that a recent publication cited single premium PPI as an example of a product where the intervention rules might have been used if they had previously existed.
Whilst the existing licensing process is fairly light touch, the FCA authorisation procedure is onerous, lengthy, and detailed. Large amounts of information have to be provided, including details of business planning, governance and senior management systems and controls.
Many lenders operating within the consumer credit sector have already received correspondence from the OFT, often when credit licences have needed renewing or maintenance payments have been required. This is because, from September 2013, current OFT licence holders will also need to register with the FCA to be able to carry on regulated activities going forward. All current OFT licence holders will need to make an application for ‘interim permission’/registration with the FCA. After 1 April 2014, it will be necessary to complete the more substantial application process for full FCA authorisation.
The online registration process is now open, (please click here). The FCA have announced that those businesses which register for interim permission by 30 November 2013 will receive a 30 per cent. fee discount (paying £245 instead of £350, or £105 instead of £150 in the case of sole traders).