FSA consults on FCA consumer credit regulation

Consumer Credit Regulation

Credit firms are required to obtain authorisation from the FCA. Scott Robert’s role is to make sure you’re following the FCA consumer credit regulation. We have the knowledge and experience in dealing with the FCA representatives and processing licence applications and renewals.

FSA Consults on FCA Consumer Credit Regulation

In March 2013, the Financial Services Authority (FSA) outlined proposals for how its successor body the Financial Conduct Authority (FCA) will regulate consumer credit. The FSA has commenced a formal consultation on its proposals, for which the deadline is 1 May 2013.

From April 2014, the FCA will regulate all types of consumer credit activity, a responsibility that currently lies with the Office of Fair Trading.

Consumer Credit Licences will lapse on 31 March 2014, and from 1 April 2014, consumer credit firms will need to hold ‘interim permission’ from the FCA. Without this permission, firms will be unable to trade. After 1 April 2014, firms will need to apply for full authorisation by a specified date, which is expected to be no later than 1 April 2016.

Not-for-profit organisations, such as debt charities, will be subject to FCA regulation.

A detailed set of principles and rules for consumer credit firms is yet to be published, but the Treasury’s own paper on the proposals suggests many conduct requirements will remain the same. A separate consultation will be conducted in autumn 2013 regarding this. However, firms can expect differences in the enforcement regime. The Chapter Summary attached to the FSA consultation paper says: “How the FCA will supervise consumer credit will be different from the OFT. Our approach to supervision will be consistent with the approach for all other firms we regulate,” and then under the heading ‘Enforcement’ it goes on to say: “Our powers under FSMA [Financial Services and Markets Act] are significantly greater than the OFT’s powers under the CCA [Consumer Credit Act].”

The FCA will regard payday lenders, pawnbrokers, credit reference agencies and debt collection firms as posing a higher risk than the other credit sectors, and will require these companies to pay higher fees. The Treasury document says: “Urgent intervention is required in the high cost credit market, in particular in the payday lending sector,” and says that the FCA has a “commitment to prioritise action on payday lending from day one.”

Firms can expect that action may be taken against them should they:

  • Breach FCA rules and/or principles
  • Breach any consumer credit legislation which remains in force after 2014
  • Breach anti-money laundering legislation
  • Conduct business without the required permissions

The FCA will be able to issue fines and warnings, ban individuals from working in financial services or withdraw a firm’s authorisation to trade. It will be able to take action regarding conduct that occurred prior to 1 April 2014, but only in accordance with the legislation that applied at the time. Larger firms can expect to be allocated a dedicated FCA supervisor, while smaller firms will be subject to collective supervision by a team of specialists in their business sector.

Contact us so we can find solutions to your business’s regulatory problems.


Payday lender MCO Capital ceases trading

In March 2013, payday lender MCO Capital Ltd finally had its Consumer Credit Licence withdrawn by its regulator the Office of Fair Trading (OFT). MCO used various trading names which included Helploan, Balance Loan, Speed Credit, Paycheck Credit and Pop Credit. The OFT originally announced its intention to withdraw MCO’s licence in August 2012, but it was seven months later before MCO announced it was withdrawing its appeal against this decision. MCO becomes the first UK payday lender to lose its licence.

On 20 March 2013, visitors to the Help Loan homepage were greeted by a simple message stating that the firm had ceased trading and thanking their ‘loyal customers.’ A telephone number for enquiries was given. No mention is made on the site of the reason for ceasing to operate.

The OFT announced its intention to ban MCO, and to fine the company £544,505, after it found evidence of deficiencies in its anti-money laundering controls, which allowed the company to be used by fraudsters.  The criminals took out over 7,000 loans in the names of MCO customers, and even though the company was aware that these customers may not have wanted to take out a loan, it still pursued them for payment. When the OFT asked them to cease this practice, it ignored their request. In addition, the OFT said: “MCO lacked the necessary skills, knowledge and experience to run a consumer credit business.” MCO still intends to appeal against the fine.

In November 2010, the Daily Mirror newspaper suggested MCO was quoting the wrong Annual Percentage Rate on its advertisements, and that the correct rate should have been a staggering 109,384%.

OFT director of credit David Fisher commented on his organisation’s decision by saying: “Removing MCO’s licence is a timely reminder that payday and other lenders risk losing their licences if they engage in unfair business practices. The way MCO chased consumers for debts they did not owe was unacceptable and caused unnecessary distress to many people.”

Gillian Guy, chief executive of charity Citizens Advice, which has campaigned vigorously against certain practices of payday lenders, described the news as a “victory for consumers.”

Earlier in March 2013, the OFT gave 50 leading payday lenders 12 weeks to improve their practices or face enforcement action, so MCO may not be the last payday lender to be stripped of their licence. The results of the OFT’s compliance review revealed widespread concerns about the way lenders communicated with and treated their customers, and with the lack of checks some lenders carry out before granting a loan.

Furthermore, any lenders for whom the OFT decides to revoke the licence in future may be forced to cease trading immediately. MCO was allowed to continue offering loans for seven months following the regulator’s decision while it decided whether to appeal. However, in February 2013, the OFT gained the power to revoke a licence with immediate effect in serious cases where it believes this step is necessary to protect the public.


OFT demands improvements from payday lenders after completing compliance review

In March 2013, consumer credit regulator the Office of Fair Trading (OFT) published the results of its compliance review into payday lending. Payday lenders offer small cash loans at high rates of interest over short periods, such as one month. As a result of the review, all 50 leading payday lenders in the UK have been instructed to make improvements to procedures and practices. If the lenders cannot demonstrate to the OFT within 12 weeks that they are complying with their regulatory obligations, then enforcement action will follow. The ultimate sanction available to the OFT is to remove a firm’s Consumer Credit Licence, without which they cannot trade.

The main areas of concern identified by the OFT are:

  • Lenders not carrying out affordability assessments
  • Not explaining sufficiently and clearly how payments will be collected
  • Use of “aggressive” methods to recover debts
  • The treatment of borrowers in financial difficulty

The OFT press release on the subject used some rather stark language to describe its findings, which included: “Evidence of widespread irresponsible lending”, “Too many people are granted loans they cannot afford to repay” and “Payday lenders’ revenues are heavily reliant on those customers who fail to repay their original loan in full on time.”

At the same time, the OFT announced its intention to refer the payday loan market to the Competition Commission (CC), citing “deep-rooted problems in how lenders compete with each other.” The OFT found that lenders compete mainly on how quickly they can provide the loan, rather than on price, and suggested that lenders did not carry out full affordability assessments as they feared losing business to a competitor as a result. Previous OFT referrals to the CC have resulted in fundamental changes to the marketplace, for example regarding payment protection insurance.

Clive Maxwell, OFT Chief Executive, commented: “We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers”

Mr Maxwell added: “Irresponsible lending is not confined to a few rogue payday lenders – it is a problem across the sector. If we do not see rapid, significant improvements by the 50 lenders we inspected they risk their licences being removed. Payday lending is a top enforcement priority for the OFT.”

The new Financial Conduct Authority (FCA) will have the power to cap interest rates charged by lenders, but the Government has resisted calls to impose a restriction on the total cost of credit.

Payday lenders are expected to comply with relevant consumer credit legislation and relevant OFT guidance such as the Consumer Credit Guidance and the Irresponsible Lending Guidance, as well as with the Code of Practice or equivalent of any trade association they belong to. Since November 2012, those lenders which are members of one of four trade associations have also had to comply with a new Good Practice Customer Charter. From April 2014, payday lenders and all other consumer credit firms will be subject to the stricter regulation of the FCA.


Government consults on impact of business regulation

In March 2013, the Government Department for Business, Innovation and Skills (BIS), commenced two consultations designed to address the issue of the regulatory burden placed on organisations acting as a barrier to growth and competitiveness. The consultations concern more than 50 non-economic regulators, which include the Health and Safety Executive, the Environment Agency, the Claims Management Regulation Unit of the Ministry of Justice, the Groceries Code Adjudicator and the Highways Agency. Financial regulators such as the Financial Services Authority and the Office of Fair Trading are not covered by the consultation.

One of the consultations concerns a proposed new Regulators’ Code, which sets out what businesses should expect from their regulators. The new Code will be “shorter, simpler and clearer” than the Regulators’ Compliance Code (RCC) which operates at present, and will set new standards in areas such as:

  • Levels of compliance support
  • Response times to stakeholder concerns
  • Fees and charges
  • Professional competence

The key aims of the proposals are to:

  • Simplify the content of the Code
  • Make the Code more accessible
  • Require regulators to publish clear service standards with relation to compliance, enforcement and other areas
  • Enable businesses, other regulated bodies and the general public to hold regulators to account

Research has found evidence that many businesses and regulatory staff alike have little or no knowledge of the RCC, and it is hoped to improve this situation.

BIS invites responses to 11 specific questions, which are listed in the document, all aimed at achieving one or more of the above aims.

Under the proposed new Code, the obligations of regulators are summarised under five main headings:

  • Regulators should carry out their activities in a way that helps businesses and regulated bodies to comply and grow
  • Regulators should provide simple and straightforward ways to communicate with those they regulate, and resolve disputes
  • Regulators should base their regulatory activities on risk, including the use of alternatives to enforcement
  • Regulators should share information about compliance and risk
  • Regulators should provide advice and guidance to help businesses and other regulated bodies meet their responsibilities to comply with the law

The proposals are part of the Government’s drive to make cost savings by cutting red tape. Through initiatives such as the Red Tape Challenge and the One-In, Two-Out rule – which requires government departments to make cost savings of double the cost of additional regulation imposed on business – the Government aims to make £1 billion of savings by June 2013.

Business Minister Michael Fallon MP said of the proposals: “Regulators have a vital role in protecting the public and creating a level playing field for competition, but red tape should never restrain hard-pressed businesses that play by the rules from growing and creating jobs. The quality of information, guidance and enforcement delivered by regulators directly affects the ability of a business to grow and succeed. So I’m inviting firms to help us craft a new settlement that supports enterprise without compromising standards.”

BIS invites comments from businesses and regulators before May 3 2013. The consultation paper can be viewed at http://www.bis.gov.uk/brdo/publications/

At the same time, BIS launched a related consultation regarding a proposed ‘growth duty’for regulators, under which regulatory bodies must consider how their regulatory activities could affect an organisation’s economic prospects. This can also be viewed at http://www.bis.gov.uk/brdo/publications/


OFT demands improvements from payday lenders as consultation is launched regarding FCA credit regulation

On March 6 2013 consumer credit regulator the Office of Fair Trading (OFT) announced the final results of its compliance review of the payday lending sector. On the same day the Financial Services Authority (FSA) launched a consultation on how one of its successor bodies, the Financial Conduct Authority (FCA) will regulate payday lending and other credit activities when it takes over responsibility for this from the OFT in April 2014.

The principal areas of concern for the OFT regarding payday lenders are:

  • Lenders not carrying out affordability assessments
  • Not explaining sufficiently clearly how payments will be collected
  • Use of “aggressive” methods to recover debts
  • The way borrowers in financial difficulty are treated

Ahead of the move to FCA regulation the OFT intends to take action. Fifty payday lenders who together comprise 90% of the market have been given twelve weeks to improve their practices or face possible OFT enforcement action. The ultimate sanction available to the OFT is to revoke a firm’s Consumer Credit Licence without which they cannot trade.

The OFT described payday lending as a “top enforcement priority,” noting that these loans are often granted to vulnerable customers and that given the high rates of interest charged the implications of irresponsible lending can be significant.

The OFT has also provisionally decided to refer the payday loan market to the Competition Commission after discovering that lenders primarily compete on how quickly the loan can be provided rather than on price.

Clive Maxwell, OFT Chief Executive said: “We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers,” and added: “Irresponsible lending is not confined to a few rogue payday lenders – it is a problem across the sector.”

According to the Treasury press release on the same subject, the Government intends to:

  • Work with the OFT and Advertising Standards Authority to improve standards of advertising amongst payday lenders
  • Consider whether independent monitoring can take place to ensure lenders are complying with their Codes of Practice
  • Press for additional requirements to be included in Codes of Practice regarding use of Continuous Payment Authority
  • Force the industry to improve data sharing, after noting that some people are taking out several loans on the same day

The FCA will regard payday lenders as higher risk than certain other types of credit firm and will require them to pay higher authorisation fees. A separate paper issued by the Treasury on March 6, says: “Urgent intervention is required in the high cost credit market, in particular in the payday lending sector,” and says that the FCA has a “commitment to prioritise action on payday lending from day one.”

The FCA has the power to cap interest rates charged by lenders but the Government is not calling for this to happen at present.

Consumer Minister Jo Swinson MP said: “The evidence of the scale of unscrupulous behaviour by payday lenders and the impact on consumers is deeply concerning.  The Government is committed to tough action to tackle these problems. The Office of Fair Trading’s (OFT) enforcement action will stop payday lenders taking advantage of those in financial difficulty. In April 2014, we are giving responsibility to regulate this industry to the FCA, who will have more rigorous powers to weed out rogue lenders.”


ASA Rules Payday Lender Should Have Disclosed Interest Rate

In January 2013, the Advertising Standards Authority (ASA) ruled against Nottingham-based payday lender Instant Cash Loans Ltd, which trades as The Money Shop. A TV viewer had queried with the ASA that the company’s television advert had failed to quote the representative APR.

Under regulation 6 of the Consumer Credit (Advertisement) Regulations 2010, the APR must be quoted whenever an advert suggests credit could be available to customers who might find it difficult to obtain credit elsewhere. So an advert for a payday lender would need to quote this interest rate – which is usually very high in the case of a payday loan – if it suggested that its clients may be unable to obtain loans from other types of companies, or would find it hard to do so.

The case centered around the interpretation of the phrase “the banks have just got harder and harder”, which was used in the advert by a previous client of the company. Instant Cash Loans argued that this phrase was not an indication that the client had found obtaining credit from the banks difficult. They pointed to the context in which the comment was made, in that the client had previously said: “What I didn’t estimate properly is how hard it is to get paid from corporate clients”, and also highlighted that his words were accompanied by a caption which included “Guy needed money while waiting for a client to pay. £100 stood in the way of Guy getting new business.” Instant Cash Loans argued that the comment about the banks related to how the client believed they had failed to support him when he experienced financial difficulties caused by clients failing to pay on time.

The advert had been approved for broadcast by Clearcast, a company set up by the UK’s main commercial TV stations to advise on advertising practice, but only after they had queried the omission of the APR with Instant Cash Loans. Clearcast accepted the company’s assertion that the APR was not required as the advert did not contain an incentive to apply for credit, and did not contain other information about the cost of the loan.

In reaching its conclusion, the ASA took advice from the Office of Fair Trading (OFT). The OFT believed that the salient phrase could be interpreted as the client saying that he had experienced difficulties in obtaining a loan from a bank, and thus ruled that the APR should have been quoted.

The ASA duly found that the advert breached 14.11 of the Broadcast Committee of Advertising Practice Code, and ordered that it was not to be broadcast again.

This was the second occasion in four months that the company had been censured by the ASA, after a ruling in September 2012 that it failed to display example repayment information sufficiently prominently.