FCA Reform of Consumer Credit Regulation

by Reed Smith
Contact

Introduction

As a response to the 2007/2008 global financial crisis, the financial regulatory system in the UK has experienced a major restructuring to address the failings of the previous system. The regulation of consumer credit is being reconsidered, following the changes that began with the split of the FSA into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

From 1 April 2014 the FCA will take over responsibility from the Office of Fair Trading (OFT) for all consumer credit regulation. On 3 October 2013, the FCA published a consultation paper with its most recent detailed proposals for the new regime.1 This paper should be read in conjunction with the FCA’s March 2013 consultation paper containing its high-level proposals.2 The FCA’s new regulations will replace the Consumer Credit Act 1974 (CCA).

How will the regulation change?

Many CCA provisions will be transferred; however, there will be several changes to the regulations. First, the intention is that the licensing and regulatory framework of consumer credit regulation from the CCA will be replaced by the Financial Services and Markets Act 2000 (as modified by the Financial Services Act 2012 (FSMA)).

FMSA gives the FCA the power to authorise, supervise, and enforce against firms, as well as to make rules for the regulation of consumer credit. The FCA-drafted rules and guidance will be a central part of the new regime and will come into force on 1 April 2014. The FCA intends to include provisions of the CCA and OFT guidance into the new rules. The new rules will be included in a new sourcebook within the FCA Handbook: the Consumer Credit sourcebook (CONC). The CONC will include both the conduct requirements for consumer credit firms and the prudential requirements for debt management firms.

Authorisation and Licensing under the New Regime

What needs to be done?

(a) Firms currently licensed under the OFT

To carry on consumer credit activities legally from 1 April 2014, firms currently holding a licence from the OFT must apply to the FCA for interim permission by 31 March 2014. Group OFT licence holders must first obtain an individual OFT licence.

Firms without interim permission on 1 April 2014 will be obliged to apply for full FCA authorisation in order to legally continue consumer credit activities. Firms with full authorisation will be required to comply fully with all of the new requirements as of 1 April 2014, whilst firms with interim permission will be allowed to comply partially during the interim period.

The FCA website is now open for interim permission applications.3 Firms with interim permission will be considered by the FCA for full authorisation between 2014 and 2016. A one-off "authorisation fee" will be payable when the firm applies for full authorisation. In addition, there will be an annual fee.

(b) Firms that are currently regulated by the FCA

FCA-regulated firms must apply for an interim variation of permission before 1 April 2014.

(c) Firms that intend to become involved in consumer credit after 1 April 2014

Firms intending to become involved in consumer credit must apply for full authorisation after 1 April 2014.

(d) Changes for authorisation for overseas firms

Currently, there is no residence requirement for overseas firms carrying on consumer credit activities in the UK. However, the new regime will require such firms to have a UK establishment and to apply for FCA authorisation from 1 April 2014 unless they are:

  • An EEA firm delivering services at a distance (within the E-Commerce Directive)
  • An EEA firm operating under certain financial services single market directives
  • An EEA firm authorised in home state with equivalent protection

New development: possible alternatives to authorisation

  • Firms that are appointed representatives of authorised firms that contractually accept responsibility for the unauthorised firm carrying on regulated activities
  • Firms that are self-employed agents of a principal held out as responsible for the agent’s conduct in carrying on the business of its principal (e.g., home collected credit sector)
  • Firms that are exempt professional firms that can be supervised by a Designated Professional Body.

FCA v. OFT: What is Different for Regulated Entities in the New Regime?

High-risk and low-risk classification Firms will be categorised into high-risk and low-risk firms to enable the FCA to increase scrutiny on higher-risk firms and on the problems that will have a greater impact on consumers. Most consumer credit licence holders will be subject to the "core authorisation regime" for higher-risk activities.

Description of classifications

Lower-risk activities:

  • Lending activities where selling goods and non-financial services is the main business and there is no interest or charges
  • Hiring goods to consumers (e.g., cars)
  • Credit broking where the selling goods and non-financial services is the main business and broking does not occur in the consumer’s home on more than an occasional basis
  • Not-for-profit debt counselling and debt adjusting
  • Not-for profit credit information services

Higher-risk activities:

  • Consumer credit lending which includes interest/charges (e.g., overdrafts, credit cards)
  • Credit brokerage
  • Debt adjusting
  • Debt counselling
  • Debt collection
  • Debt administration
  • Credit information services
  • Credit reference agency
  • Peer-to-peer lending

Consequences of classifications Limited authorisation will be available for lower-risk firms. Firms with limited authorisation will enjoy more limited reporting requirements, less proactive supervision, reduced approved-persons requirements, and no capital obligations. For example, such firms will only have to supply "key data" (credit-related income, number of transactions and complaints) to the FCA; this is less onerous than the requirements on firms subject to the core authorisation regime (see below).

New operational requirements for consumer credit firms

(a) Approved-persons regime

The FCA is introducing a new approved-person regime, for which there is currently no direct equivalent. The purpose of pre-approval is to ensure that the individual is "fit and proper" for the position.

In higher-risk firms, pre-approval by the FCA will be required for all individuals fulfilling "significant influence functions". This will include directors, non-executive directors, chief executives and partners ("governing functions"). Furthermore, the regime will cover MLRO, and individuals in "significant management functions", "compliance oversight functions", and "systems and controls functions" amongst others. In limited permission firms, only those in apportionment and oversight functions need to be approved.

(b) Periodic reporting requirements

Firms will have to undertake regulatory reporting and product sales reporting.

Regulatory reporting will occur every six months -12 months. The scope of the reporting requirements will depend on the activities undertaken by the firm. Examples of the type of information that may be required include:

  • Financial data (capital, assets, liabilities, profit)
  • Volumes (revenue, customers, transaction volume per activity)
  • Lender information (value of loans, interest rates)
  • Debt management (capital requirements and resources)
  • Client money and assets (client money held over five days, etc.)
  • Debt collection (number and value of debts)
  • Key data (credit related income, total revenue, number of transactions, etc. (for firms with limited permission))

Product sales data (PSD) relates to the original sale of the loan will be required every quarter. PSD is already required for mortgages, investment and insurance products. It includes:

  • Loan details (amount, term, interest rate, fees)
  • Loan reason
  • Borrower date of birth and postcode
  • Borrower and household income
  • Loan type

Authorised professional firms need only comply with reporting requirements if they carry out consumer credit activities as mainstream activity.

(c) Enhanced complaints recording, reporting and publication rules

Firms will need to record all complaints received, including details of how they were resolved, and keep these records for three years.

Firms will also have to report and publish certain information about their complaints. The level of reporting will depend on the activities undertaken by the firm and the revenue earned from credit-related regulated activities (+ or - £5 million). Whilst firms undertaking lower-risk activities need only report annually the number of complaints received, firms undertaking banking and credit card activities have more onerous requirements, including six monthly reporting of total complaints outstanding per product/service, complaints upheld, and time taken to close the complaint, amongst other things.

Publishing requirements also vary according to the same criteria. The detail required ranges from annual publishing of the number of complaints received, to six monthly publishing of total complaints outstanding per product/service, with details of those upheld and the time taken to resolve the complaints.

Consumer credit complaints will be dealt with under the compulsory jurisdiction of the Financial Ombudsman Service, including complaints against not-for-profit bodies providing debt advice.

(d) Financial promotion rules

Firms will have to comply with financial promotion rules. The FCA will impose a high-level principle that all promotions be clear, fair and not misleading. The FCA will create additional rules, but these will be based heavily on existing OFT guidance and the CCA’s advertising rules.

Additional requirements will be placed on firms providing high-cost short-term credit.

(e) Client assets regime

Debt managements firms and large not-for-profit debt advice bodies will need to observe certain prudential standards:

  • Hold the higher of £5,000 or 0.25% of the firm’s "relevant debts under management"
  • Ensure the firm’s prudential resources exceed requirements at all times
  • Appoint a director or senior manager responsible for overseeing the firm’s holding of client assets. For large debt management firms, individuals in these positions will need to be FCA approved.

1. CP13/10: Detailed proposals for the FCA regime for consumer credit. Available at: http://www.fca.org.uk/your-fca/documents/consultation-papers/cp13-10; CP13/7: High-level proposals for an FCA regime for consumer credit. Available at: http://www.fca.org.uk/your-fca/documents/consultation-papers/fsa-cp137 
2. CP13/7: High-level proposals for an FCA regime for consumer credit. Available at: http://www.fca.org.uk/your-fca/documents/consultation-papers/fsa-cp137  
3. http://www.fca.org.uk/firms/firm-types/consumer-credit/consumer-credit-interim

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith
Contact
more
less

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.