Consumer Credit firms prepare for FCA regulation

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Consumer Credit Firms Prepare for FCA Regulation

From 1 April 2014, regulation of consumer credit in the UK will transfer from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA).

Detailed rules for credit firms to follow under the new regime are yet to be published. An initial consultation on this issue ended on 1 May 2013, and it is expected that a more wide-ranging consultation will take place in autumn 2013. Indications are that the rulebooks will be based around many of the requirements of the existing Consumer Credit Act and the OFT’s existing guidance. Consumer Credit Act requirements regarding advertising are not expected to be incorporated into the new regime, and firms are likely to be subject to the current FCA rules on financial promotions instead.

All credit firms will need to obtain ‘interim permission’ to trade from the FCA by 1 April 2014, unless they intend to become an appointed representative of an FCA-authorised firm. It is expected that firms will require ‘full permission’ by 1 April 2016. Existing Consumer Credit Licences will lapse on 31 March 2014.

In order to obtain FCA authorisation, firms must first satisfy the regulator that they meet its ‘Threshold Conditions’, which include:

  • The head office must be located within the UK
  • The firm must hold sufficient financial resources
  • Key individuals within the firm must be ‘fit and proper’

Payday lenders, pawnbrokers and debt collectors will be regarded as higher risk firms by the FCA and are expected to pay higher fees. Examples of firms that will be classed as lower risk are retailers and motor dealers for whom credit is a secondary activity.

Credit firms will need to ensure that their stationery is updated by the switchover date to state that they are regulated by the FCA. This stationery will also need to state if the firm holds interim permission or full permission.

The FCA has greater resources to supervise firms than the OFT, and has more wide-ranging powers. 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.

Firms should 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 impose the same sanctions on credit firms as it can on firms it currently regulates. It can 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 in credit firms that occurred prior to 1 April 2014, but only in accordance with the legislation that applied at the time.

Unlike other FCA regulated activities, it is not anticipated that consumer credit will be covered by the Financial Services Compensation Scheme.


New bosses appointed at OFT

The Office of Fair Trading (OFT) has appointed three new senior directors, all on a temporary basis, to lead three of its divisions: consumer credit, policy and cartels/criminal enforcement.

David Fisher has been appointed as Senior Director of Consumer Credit and Anti-Money Laundering. He was previously director of consumer credit and anti money laundering at the OFT, and has held other senior roles at the OFT since joining the organisation from the Competition Commission in 2001.

Consumer credit regulation, for which Mr Fisher is responsible, will transfer from the OFT to the Financial Conduct Authority in April 2014.

The new Senior Director of Policy is Sheldon Mills. His brief includes responsibility for competition, markets and consumer policy. Mr Mills worked as a solicitor in private practice advising on mergers and related transactions until 2010, when he joined the OFT as head of its Mergers Group. In his new role he will make decisions on Phase I mergers.

In his role, Mr Mills will be assisted by antitrust, competition and trade lawyer Andrea Gomes da Silva, who will join the OFT on a nine-month secondment from Freshfields Bruckhaus Deringer. She will lead a guidance project regarding the creation of the Competition and Markets Authority, the new body which will assume the responsibilities of the OFT and the Competition Commission from April 2014.

Lastly, Stephen Blake has been appointed as Senior Director of Cartels and Criminal Enforcement. He will also serve on the OFT’s Policy Committee, alongside Mr Mills. Another former private solicitor, since joining the OFT in 1998 he has worked as a competition lawyer in the Legal Division and as deputy director of the Cartels Group, and has undertaken a secondment to the European Commission’s Directorate-General for Competition. Mr Blake takes over this role from Ali Nikpay, who has left the OFT to take up a new role in the antitrust and competition group at law firm Gibson, Dunn & Crutcher.


New Requirements Imposed on Claims Management Companies

From 8 July 2013, claims management companies (CMCs) in the UK will be subject to new regulatory requirements. Consumer groups have criticised CMCs in the past over matters such as: claims made in their advertising; the lack of transparency over the fees charged; and cold calling and texting of members of the public.

The most far-reaching change will be a ban on verbal contracts, which many CMCs have relied on previously. Instead, a formal written contract will need to be drawn up by the firm, and the terms of the contract will need to be agreed by the client before any fees can be taken. However, the move falls short of the outright ban on charging up-front fees which some consumer groups had demanded.

Another new obligation is for the company to alert all their customers within 14 days if they are subject to regulatory enforcement action.  260 CMCs had their authorisation removed by the Claims Management Regulator between April 2011 and March 2012. Between April and November 2012, a further 209 firms lost their licences, while three firms were suspended and 140 received warnings.

Companies must also describe themselves as being regulated by the Claims Management Regulator, instead of by the government department the Ministry of Justice (MoJ). Although the Claims Management Regulator is part of the MoJ, it has been suggested that the old wording could amount to an inference that the government has endorsed the firm.

Head of the Claims Management Regulator, Kevin Rousell said of the new obligations: “Time and time again we see examples of consumers who have inadvertently agreed to a contract with a claims management company without a written contract in place. I want people to have time to think through their arrangement and be happy and clear about exactly what the deal is before they part with any money. These new rules will root out poor practice and ensure consumers are better protected by making contract terms much clearer.”

These new rules are in addition to the rules which came into force on 1 April 2013. From this date, CMCs were banned from issuing advertisements that offered cash inducements, and were banned from receiving referral fees. It is also now possible for a customer to refer a complaint about a CMC to the Legal Ombudsman if they are not satisfied with the company’s response.

Some of the new wording in the regulator’s rulebook reads as follows:

  • In soliciting business through advertising, marketing and other means a business must not offer any cash payment or similar benefit as an inducement for making a claim.”
  • “A contract between a business and a client must be signed by the client, and the business may not take any payment from the client until the contract is signed.”
  • A business must keep the client informed of the progress of the claim, including any significant changes to costs that the client may have to meet, and must inform the client of any suspension or variation of the business’s authorisation within 14 days of any imposition of such action.”

There are around 3,000 CMCs in the UK, of which around 1,900 handle personal injury claims and around 1,100 deal with payment protection insurance mis-selling and other financial matters. However, 93% of complaints about CMCs concern companies who process financial claims.


Citizens Advice calls for payday lenders and debt collectors to be stripped of licence

Citizens Advice, a nationwide charity that offers advice on consumer issues, has written to consumer credit regulator the Office of Fair Trading (OFT) calling on it to withdraw the Consumer Credit Licences of four payday lenders and three debt collection firms. The firms have not been named, but it is reported that two of the lenders are well-known companies.

In the case of the four payday lenders, Citizens Advice has requested that the OFT exercises its new power, granted in February 2013 under the terms of the Financial Services Act, to revoke their licences with immediate effect. Previously, firms who the OFT wished to withdraw licences from could continue trading while they appealed against the judgement.

Citizens Advice said that the four lenders were causing their customers “significant distress” and were making their debt problems worse. It believes it has evidence that the lenders are:

  • Charging excessive fees
  • Taking money from customers who have satisfied their debts
  • Chasing people for repayment of loans they never applied for
  • Being aggressive and abusive to customers

The debt collectors were said to be engaging in “aggressive and threatening behaviour”, and overstating their powers.

The OFT has promised to consider the matters raised in the letter, but said it could not comment further at this stage.

Citizens Advice Chief Executive Gillian Guy said: “The OFT must take immediate action to investigate and suspend these companies. These firms pose a real risk to people looking to get a short term loan to help tide them over. Our evidence shows these lenders are behaving as a law unto themselves.”

Citizens Advice is conducting a 12 month long study of the payday loan market, and is compiling evidence regarding other lenders it believes are acting inappropriately.

In March 2013, the OFT published the final results of a compliance review of the payday lending sector, where they found “evidence of widespread irresponsible lending”. As a result of this review, all 50 leading payday lenders were given 12 weeks to improve their practices and procedures or face enforcement action from the OFT, action which could include the removal of their licences. So could some of the UK’s best known payday lenders soon be forced to cease trading?

From April 2014, all consumer credit firms will be subject to the stricter regulation of the Financial Conduct Authority (FCA), one of the bodies which replaced the former Financial Services Authority on 1 April 2013. The FCA has said it will regard payday lenders and debt collectors as high risk companies, who will be required to pay higher fees, and has said that scrutinising the payday loan sector will be a top priority.

National Debtline, which gives free assistance to people with debt problems, said that calls from borrowers with payday loan difficulties increased by 94% in 2012, compared to the previous year. The Financial Ombudsman Service, which assesses complaints about financial services organisations, received 30% more complaints about payday loans in the nine months from April to December 2012 than it had in the entire financial year from April 2011 to March 2012.


Lloyds fined by FSA for late PPI compensation payments

In February 2013, the Financial Services Authority (FSA) fined Lloyds Banking Group £4,315,000 for delays in paying compensation to customers for mis-sold payment protection insurance (PPI). Once a PPI complaint is upheld in favour of the customer, the provider should pay the redress to the client within 28 days, yet this timescale was not met for over 140,000 customers of Lloyds TSB, Halifax and Bank of Scotland.

In spite of the millions of PPI policies mis-sold by the banks, this is the first time any of the ‘big four’ banking groups has been subject to FSA enforcement action over PPI.

Of the 582,206 cases where Lloyds agreed to pay PPI compensation between May 2011 and March 2012, 140,209, or 24%, involved waits of longer than 28 days. The FSA’s figures also reveal that 8,800 customers had to wait over six months for their funds.

The FSA has asserted that the failings occurred due to Lloyds not having an adequate process for preparing redress payments, their lack of forward planning, deficiencies in the knowledge and experience of staff, ineffective tracking of redress payments and ineffective risk management systems.

In addition to payment of the fine, Lloyds was required to compensate the customers affected by the delays by paying them interest on the redress amounts at 8% per annum.

Tracey McDermott, the FSA’s director of enforcement and financial crime, said:

“The industry let customers down badly in relation to the sale of PPI. The significant volume of complaints is a product of LBG’s own failings and the least customers can now expect is that redress, when it is due, will be paid promptly.

“In short, LBG’s PPI redress payment systems fell well below the standard the FSA expects, and the size of this fine reflects how seriously we view these breaches. All regulated firms must treat those who complain fairly and that includes paying redress promptly when it is due.

“PPI is an area of continuing focus for the FSA and we continue to monitor how firms handle complaints and pay redress.”

Lloyds blamed the sheer volume of PPI complaints it has received for the delays. A bank spokesman said:

“When we took the lead in 2011 to compensate customers on PPI, we had not fully anticipated the volume of complaints to be processed and experienced some administrative errors as we scaled up our systems and processes. We acknowledge this led to some customers not being compensated on time and we apologise to them.

“It is important to note almost all customers who were due redress during the review period have now been paid in full and, as the FSA notes, we have taken steps to ensure customers have not been financially disadvantaged.”

It remains to be seen just how large a deterrent this fine will be. Martin Lewis, founder of the website MoneySavingExpert.com, who claims to have highlighted this issue back in October 2011, remarked:

“In truth this fine is paltry. £4.3 million is just 0.08% of its total PPI redress budget of £5.3bn, a relatively minor cost of scale – and a fraction of the money it was late to pay. So it’s questionable how big an impact it’ll have.”

Since Mr Lewis’s comments, Lloyds has been forced to increase its provision for mis-sold PPI to £6.8 billion.