31Oct

Licences removed from three debt managers

Three companies in the debt management sector lost their Consumer Credit Licences in October 2013. In all three cases, consumer credit regulator the Office of Fair Trading (OFT) had already announced their intentions to revoke or not to renew the licences as a result of the firms’ practices. In the case of two of the firms, their licences were terminated after they withdrew their appeals against the initial OFT ruling, while the third firm lost its appeal.

Stockport-based First Step Finance (FSF) was initially informed by the OFT in November 2012 that it was minded to revoke its licence. The OFT identified serious concerns with the firm’s marketing material and other information provided to clients, particularly with regard to disclosure of risks and charges. FSF initially announced it would appeal the decision, but then decided to accept the ruling. The firm was then allowed by the OFT to continue trading for a short period, subject to conditions, in order to facilitate an orderly wind down of its business. FSF’s debt management business has now been transferred to Debt Help & Advice Ltd, although the company continues to trade as a payment protection insurance claims manager under the jurisdiction of the Ministry of Justice.

Lancashire-based Welcome Solutions Ltd, which traded as debtsorters.co.uk, also announced it was withdrawing its appeal. The OFT found in January 2013 that Welcome was incorrectly suggesting it provided a free service, was not providing risk warnings on its advertising material and had provided false client testimonials.

Manchester-based Debt Connect (UK) Ltd lost its licence after the First Tier (Consumer Credit) Tribunal upheld the OFT’s January 2013 ruling that the firm’s licence should not be renewed. Debt Connect was said to have provided “misleading and inaccurate information” to its customers. The Tribunal said that Debt Connects Managing Director, Mr Sharma, had “insufficient skill, knowledge and experience.” The licence of associated company Connected Claims Ltd has also been removed.

This illustrates just how important it is for consumer credit firms to meet their regulatory obligations, especially regarding the fair treatment of customers. From April 2014, when consumer credit regulation transfers to the Financial Conduct Authority (FCA), they will be subject to greater scrutiny. The FCA has more resources than the OFT to supervise firms and can impose a wider range of penalties.

Commenting on the matter, David Fisher, OFT Senior Director of Consumer Credit, said: “These results are the latest in our continuing efforts to improve practices across this sector. We expect businesses in the debt management sector to behave with integrity and treat their customers fairly. They must be transparent about the service they are selling, making clear to prospective customers the costs they will incur and the risks they take. We will not hesitate to revoke the licences of debt management businesses that fail to do so.”

25Oct

FCA complaints data shows slight fall

Perhaps there are finally some signs that the payment protection insurance (PPI) mis-selling scandal has peaked. The Financial Conduct Authority (FCA)’s complaints data shows that around 500,000 fewer complaints were received against regulated firms in the first six months of 2013 than in the second half of 2012. The total for the period January to June was 2.9 million. 1,786,626 of the complaints related to PPI – some 61% of the total.

Barclays Bank was the institution receiving the most complaints, with 370,733, although more than this was received in total by the various institutions of Lloyds Banking Group. Lloyds Bank received 253,735 complaints and Bank of Scotland 222,249, putting them second and fourth respectively in the table. MBNA was in third place.

51% of the complaints in the first six months of 2012 were upheld by the relevant firm. Most high street banks had an uphold rate of between 60% and 70%, although Bank of Scotland and Co-operative Bank had a rate of below 50%.

A total of £2.55 billion in customer redress was paid during the six month period.

92% of complaints were resolved within the eight week period in which the FCA normally expects firms to resolve complaints. Some firms have struggled in recent years to meet this eight week target given their backlog of PPI complaints. Many smaller firms closed 100% of their complaints within this period, and the worst high-street bank in this respect was Santander at 83% (excluding Northern Bank which does not operate in England, Wales & Scotland).

Martin Wheatley the FCA’s chief executive, said: “We expect firms to put their customers at the heart of their business – an important part of this is the way they handle customer complaints. Publishing complaints data is a powerful tool that helps encourage competition between firms to improve their service to customers; and help consumers assess their relationships with banks and other providers.”

The reduced number of complaints being received by FCA regulated firms may eventually be reflected in the figures of the Financial Ombudsman Service (FOS), the independent body that adjudicates on complaints where the customer does not agree with the firm’s assessment. For now, however, the FOS figures show that they received 143,177 complaints in their second quarter, which ran from July to September 2013. This represents a 39% increase on the equivalent period in 2012. 115,247 of the complaints – 81% of the total – concerned PPI.

In its financial year of April 2012 to March 2013, the FOS received just over 500,000 complaints about all financial products. However, in the two quarters of the 2013/14 year to date, 247,399 complaints have been received by the FOS about PPI alone, raising the prospect that the current financial year could see around 500,000 complaints solely about PPI.

17Oct

FCA reveals detailed proposals for regulating consumer credit

The Financial Conduct Authority (FCA) has issued its detailed proposals for regulation of consumer credit when it takes over responsibility for this from the Office of Fair Trading (OFT) on April 1 2014. The FCA has launched a consultation on its proposals, and organisations are invited to send their comments before December 3. Final rules are expected to be published in February or March 2014.

The full proposals can be viewed at http://www.fca.org.uk/your-fca/documents/consultation-papers/cp13-10,

Firms can expect to be classified as low risk or high risk by the FCA. Organisations in the higher risk category can expect to be subject to increased levels of monitoring; will need to obtain ‘full authorisation’ as opposed to ‘limited permission’; will be required to provide more information about their ongoing activities; will be subject to tougher requirements regarding the approval of key individuals; and in some cases will not be permitted to become appointed representatives.

Higher risk activities will include:

  • Lending, other than where the  organisation’s core business is not financial services and there is no charge for interest or fees
  • Credit broking, other than where credit brokerage is a secondary activity for an organisation whose core business is not financial services
  • Debt counselling and debt adjusting by commercial organisations
  • Debt collection
  • Credit information services
  • Credit reference services
  • Peer-to-peer lending – these lenders may not currently require OFT authorisation, but will come under the FCA regime

Activities classed as lower risk will include:

  • Lending, where the organisation’s core business is not financial services and there is no charge for interest or fees
  • Credit hire
  • Credit broking where brokerage is a secondary activity for an organisation whose core business is not financial services
  • Debt counselling and debt adjusting by not-for-profit bodies
  • Credit information services provided by not-for-profit bodies

Consumer credit organisations should apply for interim permission from the FCA before April 1 2014. After obtaining interim permission, organisations will then need to obtain full FCA authorisation within two years of the switchover. All applicants for FCA authorisation will need to meet their existing threshold conditions, which relate to the organisation’s legal status, business model, financial resources and fitness & propriety.

Once authorised, firms will need to comply with the FCA’s Principles for Business, and with the requirements of the FCA Handbook. The new consumer credit sourcebook in the Handbook will be known as CONC.

Many of the rules firms will need to follow will be based around the Consumer Credit Act and existing OFT guidance. However, there are a series of new requirements that apply to all credit firms, and further new requirements for certain types of firms.

Some of the provisions applicable to all firms include the need to submit data reports to the FCA; and a widening of the definition of an eligible complainant.

Examples of the new requirements for specific business sectors include:

  • Limits on rollovers and use of continuous payment authority by payday lenders.
  • The need for risk warnings on payday loan promotional material
  • More rigorous payday loan affordability checks
  • New prudential requirements and client money handling rules for debt managers

FCA authorisation will not be required for certain members of professional associations, for whom credit is a secondary activity; insolvency practitioners; tracing agents; or cycle to work schemes covered by a group licence. Some organisations will also have the option of becoming an appointed representative – an appointed representative firm does not hold FCA authorisation, but is supervised by another firm which does.

14Oct

Proposed New Regulations For Credit Firms Following Switch To FCA Regulation

General information, and rules applicable to all credit firms

 

Consultation

 

In early October 2013, the Financial Conduct Authority (FCA) announced its proposals for regulating consumer credit when it takes over responsibility for this sector from the Office of Fair Trading (OFT) on April 1 2014.

 

The FCA has launched a consultation on its proposals, and organisations are invited to send their comments before December 3, or to give their views at one of the consumer credit roadshows taking place during the autumn. Final rules are expected to be published in February or March 2014, ahead of the switchover.

 

The full proposals can be viewed at http://www.fca.org.uk/your-fca/documents/consultation-papers/cp13-10, but the proposals as they relate to different types of credit firm are summarised here.

 

Applications

 

Consumer credit organisations should apply for interim permission from the FCA before April 1 2014. Applications are already being accepted. After obtaining interim permission, organisations will then need to obtain full FCA authorisation within two years of the switchover.

 

Threshold conditions

 

All applicants for FCA authorisation will need to meet their existing threshold conditions, which are:

 

–       To have a head office and registered office in the UK

–       To be established as a body corporate

–       Not to have close links with another organisation that prevent the FCA supervising the organisation adequately

–       To maintain adequate resources

–       To be fit & proper. Assessment here may cover areas such as previous dealings with regulators; the quality of internal systems & controls; the skill levels present within the organisation; previous convictions, disqualifications or disciplinary action; complaints record; the financial crime risk posed

–       To have a business model that promotes both the interests of consumers and the integrity of the UK financial system

 

Firm classifications

 

The text below states whether firms can expect to be classified as low risk or high risk by the FCA. Organisations in the higher risk category can expect to be subject to increased levels of monitoring; will need to obtain ‘full authorisation’ as opposed to ‘limited permission’; will be required to provide more information about their ongoing activities; will be subject to tougher requirements regarding the approval of key individuals; and in some cases will not be permitted to become appointed representatives.

 

All firms will be categorised into one of four categories: CF1, CF2, CF3 and CF4. As with existing FCA-regulated firms, those in the CF1 and CF2 categories will be allocated a named FCA supervisor. CF3 and CF4 firms will be supervised by a team who specialise in their business sector, and will also have access to the FCA’s Firm Contact Centre for assistance. The majority of credit firms will be in the CF4 category.

 

Reporting

 

An important part of the way the FCA supervises firms at present is to require firms to submit data about their business activities – e.g. business mix, customer mix, revenue, profit, assets, financial resources, complaints – on a regular basis. It is not proposed that firms holding interim permission will be subject to the submission requirements, but once full permission has been obtained, organisations with revenue from credit activities of more than £5 million will be required to submit reports every six months via the FCA’s GABRIEL system, while other firms will need to report every 12 months.

 

Principles for Business

 

All regulated firms will need to comply with the FCA’s Principles for Business, and with the requirements of the new consumer credit sourcebook (to be known as CONC) that apply to them. The principles are 11 high-level requirements that responsible credit firms should already be following, e.g. the need to treat customers fairly and the need to conduct business with integrity.

 

Other existing FCA sourcebooks

 

Credit firms should expect that the provisions of the FCA’s sourcebooks called GEN and SYSC will apply to them. General Provisions (GEN) concerns issues such as disclosure of the firm’s regulatory status, use of logos and maintaining adequate insurance. There will not be a requirement for a firm’s stationery to disclose whether they hold limited permission or full authorisation. The standard statement that all regulated firms can use here will be either ‘authorised and regulated by the Financial Conduct Authority’ or ‘authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority’. Smaller firms will not be subject to regulation by the Prudential Regulation Authority, and so should expect to use the first statement.

 

Senior Management Arrangements, Systems & Controls (SYSC) concerns the responsibility of senior management for the way the firm conducts its affairs, risk management, record keeping, conflicts of interest, whistleblowing and much more.

 

Complaints

 

All credit firms are already subject to the jurisdiction of the Financial Ombudsman Service (FOS) for customer complaints. However, the new regime will increase the number of firms, partnerships and other bodies who can make complaints. Essentially, the same eligibility requirements will apply as for existing FCA regulated firms, in that complaints to the FOS will be permitted from micro-enterprises with turnover of less than EUR 2 million.

 

Firms will need to keep records of all complaints received, and details of how they were resolved. These records should be retained for a minimum of three years. In practice, many credit firms already carry out these actions.

 


Financial crime

 

All organisations will be required to put together detailed procedures explaining how they will reduce the likelihood that their organisation is used to facilitate financial crime. Those currently subject to the OFT’s Money Laundering Regulations will need to comply with the FCA’s Anti-Money Laundering Rules, which include requirements to maintain records of transactions; and to appoint a senior individual as Money Laundering Reporting Officer, who will make reports of suspicious activity to the National Crime Agency.

 

Exemptions from FCA regulation

 

Examples of organisations who will not require FCA authorisation include:

  • Professional bodies – members of professional associations such as law and accountancy institutes may be able to continue with credit-related activities under the supervision of their association. This exemption will not apply where credit is a major part of the firm’s business, or where the firm requires authorisation for other activities regulated by the FCA.
  • Insolvency practitioners
  • Tracing agents – there will be no need for these agents to be authorised, provided they confine their activities to tracing borrowers and do not take steps to collect any debts.
  • Cycle to work schemes – an employer currently covered by a group consumer hire licence for such a scheme will not require FCA authorisation.
  • Local authorities – Councils which carry out unsecured lending are expected to be granted interim permission under the new regime, but details of how this will operate are still being finalised.

Any organisation in doubt as to whether they will require FCA authorisation is advised to seek professional advice as soon as possible.

Transition periods

 

There will be a six-month transition period following the switchover, with the FCA saying it will not take enforcement action against firms during this period, unless they breach existing Consumer Credit Act requirements or OFT guidance. Most of the requirements come into force though on the switchover date of April 1 2014, and where there are exceptions to this, details are given in the text below.

 

 

Lenders

 

Risk classification

 

Organisations for whom lending of credit is incidental to their main business, whose core business is not financial services and who do not charge interest or fees will be regarded as low risk by the Financial Conduct Authority (FCA). The example given in the consultation paper is of an organisation that collects membership fees in instalments.

 

Otherwise, lenders can expect to be placed in the higher risk category. There is every indication that the FCA regards payday lending as posing a particularly high risk.

 


Payday and short-term lending

 

It looks likely that payday lenders will see some significant changes come April. The FCA is proposing limiting to two both the number of times a loan can be rolled over and the number of times a firm can unsuccessfully try to recover a loan via a continuous payment authority (CPA). Before a loan is rolled over, there will be a requirement to provide an information sheet to the customer, which will need to provide information on sources of free debt advice. Re-financing of a loan should only occur if both the customer requests it, and the lender believes it is in the customer’s interests to do so. Indeed, the consultation paper invites views as to whether limiting rollovers to one per loan would be more appropriate. Regarding CPAs, lenders will also not be permitted to use this facility to obtain part payment on a loan.

 

Short-term lenders can also expect to have to include risk warnings on their promotional material. A promotion will need to prominently include the following:

 

‘Think! Is this loan right for you? Over 2 million short-term loans were not paid off on time in 2011/12. This can lead to serious money problems. If you’re struggling, go to www.moneyadviceservice.org.uk for free and impartial help.’

 

Lenders will need to carry out more rigorous affordability checks, which will need to cover issues such as credit history, existing financial commitments, likely future changes in financial circumstances and whether the applicant is considered to be a ‘vulnerable customer’. When the Office of Fair Trading (OFT) referred the payday loan market to the Competition Commission in spring 2013, it expressed concern that lenders were competing based on the speed with which they could provide a loan, and the FCA has vowed to stop lenders making lending decisions in a matter of minutes.

 

Many of the requirements for payday lenders, including those regarding rollovers, CPAs and risk warnings, will not come into force until July 1 2014, three months after the switchover.

 

A price cap or a cap on the interest rate is not proposed at present, but the FCA has included a question about price caps in its consultation.

 

The FCA rulebook will use the terminology ‘High-cost short-term credit’ instead of payday loan. High-cost short-term credit is defined as an unsecured loan, repayable within 12 months, that has an APR in excess of 100%, and which is not an overdraft.

 

“We consider that the high-cost short-term credit sector poses a potentially high risk to

consumers in financial difficulty,” said the FCA in the consultation paper.

 

Whilst acknowledging that payday lending had a role to play, in the press release which accompanied the consultation paper, FCA chief executive Martin Wheatley warned payday lenders by saying: “Today I’m putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.”

 

Re-financing

 

All lenders will be subject to the requirement to re-finance a loan only at the customer’s request, and only if they believe doing so is in the borrower’s interests.

 

Second charge lending

 

Secured loan lenders offering second-charge mortgages may see their regulatory burden reduce in some respects. Unless the firm also carries out first-charge lending, there will be no routine requirement for a second-charge lender to report loan data to the FCA, other than complaints data. However, the FCA may request data from firms where it believes the data are necessary to effectively supervise the firm.

 

 

Hirers

 

Organisations that hire goods to consumers will be regarded as low risk in the new regime. The Financial Conduct Authority (FCA) has not detailed specific new requirements for credit hirers in the consultation paper. Firms in this sector should ensure they comply with all the requirements in the ‘rules applicable to all credit firms’ section above.

 

 

Brokers

 

Organisations for whom credit brokerage is a secondary activity, and whose core business is not financial services, will be regarded as low risk firms. The example given in the text is of a motor dealership. Brokerage activities associated with the Green Deal scheme and with vehicle lease contracts will also be lower risk. However, most broking activities taking place in a customer’s home will be regarded as higher risk.

 

All other brokers can expect to fall into the higher risk category, including those who act as introducers.

 

Current Office of Fair Trading (OFT) rules allow firms to carry out certain activities related to arranging loans, defined as ‘credit intermediation’, without having a consumer credit licence. However, under the Financial Conduct Authority (FCA), all activities currently defined as intermediation will be classed as ‘credit brokerage’ and will require authorisation.

 

The FCA has not detailed specific new requirements for credit brokers in the consultation paper. Firms in this sector should ensure they comply with all the requirements in the ‘rules applicable to all credit firms’ section above.

 

 

Peer to peer lenders

 

Peer-to-peer lending, defined as ‘operating an electronic system in relation to lending,’ will be a Financial Conduct Authority (FCA) regulated activity come April 2014. Peer lenders can expect to have to meet new standards regarding:

 

  • explanations of the main features and risks of the product
  • credit checking
  • financial promotions

 

Peer-to-peer lending will be regarded as a high risk activity by the FCA.

 

A borrower will also have a 14 day cancellation period. For borrowers in default, there will be a requirement to provide an information sheet to the customer, which will need to provide information on sources of free debt advice. Peer lenders offering loans secured against the borrower’s home will need to give an appropriate risk warning to this effect. Those that offer short-term loans, debt collection or credit information services will be subject to the same requirements for these activities as organisations for whom these are their principal activities.

 

A separate consultation will be conducted regarding the crowd-funding element of peer lending. This is expected to take place later in October 2013.

 

 

Debt collection

 

Debt collection will be regarded by the Financial Conduct Authority (FCA) as a high risk activity come the switchover.

 

Tracing agents – who simply locate borrowers and do not take further steps to collect the debt – currently require a licence in the debt collection category, but will not be subject to FCA regulation.

 

Insolvency practitioners will also be exempt from the FCA regime when carrying out debt adjusting, debt counselling, debt administration or debt collecting activities.

 

The FCA has not detailed specific new requirements for debt collectors in the consultation paper. Firms in this sector should ensure they comply with all the requirements in the ‘rules applicable to all credit firms’ section above.

 

 

Debt counselling / adjusting

 

Exemptions for not-for-profit bodies

 

Not-for-profit debt advice services will be subject to Financial Conduct Authority (FCA) regulation, but will not need to pay an authorisation fee. They will also be regarded as lower risk organisations. Organisations currently covered by a group Office of Fair Trading (OFT) licence will not need to apply for interim permission as they will be automatically transferred to a new ‘limited permission’ regime.

 

These not-for-profit bodies are the only debt managers, counsellors and adjusters who can expect to be regarded as low risk organisations under the new regime. Commercial debt managers, counsellors and adjusters will be high risk firms.

 

The new rules will draw a distinction between generic debt advice, and advice which is aimed at liquidating a specific debt. Firms giving generic advice will remain subject to the FCA’s Principles for Business, while other organisations will need to comply with conduct standards similar to the OFT’s existing Debt Management Guidance.

 

Capital requirements

 

Debt managers and advisers will be subject to new prudential requirements specifying a minimum level of capital they must hold. Such a requirement is commonplace for existing FCA authorised firms. All commercial debt managers, and not-for-profit bodies holding £1m or more of client money, or who expect to hold this amount within 12 months, will need to maintain capital of £5,000, or 0.25% of relevant debts under management, whichever is higher. However these requirements will not be fully implemented until April 1 2017, and there will be no prudential requirement for organisations holding interim permission. The prudential resources required can be calculated as Share capital + reserves + interim net profits + eligible subordinated debt – investments in own shares – intangible assets – investments in subsidiaries – interim net losses.

 


Client money

 

Commercial debt managers who hold client money can expect to have to:

 

  • keep client money separate from the main company account, and where the funds are passed to a bank, obtain a written undertaking from the bank that it will do this
  • maintain clear records of client money receipts
  • pay any interest that is due on the money
  • make payments to creditors within five business days, or compensate clients where this does not occur
  • return money within five days of a client withdrawing from a debt management plan
  • have adequate systems & controls in place to ensure that client money is correctly managed.

 

Regarding the last requirement, there will be an obligation to have an independent annual audit, and to send the results of this audit to the FCA. All firms should also conduct regular internal reconciliations – for large firms who carry out daily transactions, these checks should take place on a daily basis.

 

Each firm must appoint a director or senior manager to oversee the process of handling client money. Client money records must be kept for five years.

 

Appointed representatives of debt management firms will not be permitted to hold client money within their own account.

 

The requirements for handling client money will not take effect until the firm holds full authorisation, and will thus not apply during any interim permission period.

 

Fees

 

There will also be restrictions on charging upfront fees, with firms required to spread the cost burden over time.

 

Complaints

 

Contrary to earlier indications, complaints about not-for-profit bodies made by micro-enterprises (with turnover of less than EUR 2 million) will be subject to the jurisdiction of the Financial Ombudsman Service (FOS). However, not-for-profit bodies should not expect to pay the FOS general levy.

 

Compliance officer

 

Debt managers will need to appoint a dedicated compliance officer to meet the Financial Conduct Authority’s Systems & Controls requirements.

 

Exemption for insolvency practitioners

 

Insolvency practitioners will be exempt from the FCA regime when carrying out debt adjusting, debt counselling, debt administration or debt collecting activities.

 

 


Credit repair

 

Not-for-profit bodies will be regarded as low risk where they carry out activities related to improving an individual’s credit record. All other firms carrying out this activity will be regarded as higher risk.

 

Credit repairers will need to appoint a dedicated compliance officer to meet the Financial Conduct Authority’s Systems & Controls requirements.

 

The Financial Conduct Authority (FCA) has not detailed specific new requirements for credit repairers in the consultation paper. Firms in this sector should ensure they comply with all the requirements in the ‘rules applicable to all credit firms’ section above.

 

 

Motor trade

 

Much of the motoring industry can expect to be regarded as low risk under the new regime. Examples of firms the Financial Conduct Authority (FCA) believes will pose less risk include dealerships for whom credit broking is a secondary activity; and firms involved in selling vehicle lease contracts.

 

The FCA has not detailed specific new requirements for the motor trade in the consultation paper. Firms in this sector should ensure they comply with all the requirements in the ‘rules applicable to all credit firms’ section above.

 

 

Credit reference agency

 

These agencies can expect to fall into the higher risk bracket when the new regime commences.

 

Only firms whose main activity is providing credit references are likely to receive permission to carry out this activity under the new regime.

 

The Financial Conduct Authority (FCA) has not detailed specific new requirements for credit reference agencies in the consultation paper. Firms in this sector should ensure they comply with all the requirements in the ‘rules applicable to all credit firms’ section above.

 

 

Appointed representatives

 

The term ‘appointed representative’ currently has no relevance to Office of Fair Trading (OFT) regulation of credit. However, this will be an option for some under the Financial Conduct Authority (FCA) regime, and is currently used by many financial advice firms who are members of networks. Essentially the appointed representative (AR) firm does not hold an FCA authorisation, but is supervised by another firm which does, known as the principal firm. The regulator will hold the principal firm accountable for any failings in the AR’s activities.

 

However, the AR route will not be open to the following organisations:

 

  • Lenders, other than those providing interest-free credit with no charges
  • Peer- to-peer lenders
  • Credit reference agencies

 

Appointed representatives of debt management firms will not be permitted to hold client money within their own account.

09Oct

FCA Reveals Detailed Proposals For Regulating Consumer Credit

The Financial Conduct Authority (FCA) has issued its detailed proposals for regulation of consumer credit when it takes over responsibility for this from the Office of Fair Trading (OFT) on April 1 2014. The FCA has launched a consultation on its proposals, and organisations are invited to send their comments before December 3. Final rules are expected to be published in February or March 2014.

The full proposals can be viewed at http://www.fca.org.uk/your-fca/documents/consultation-papers/cp13-10

Firms can expect to be classified as low risk or high risk by the FCA. Organisations in the higher risk category can expect to be subject to increased levels of monitoring; will need to obtain ‘full authorisation’ as opposed to ‘limited permission’; will be required to provide more information about their ongoing activities; will be subject to tougher requirements regarding the approval of key individuals; and in some cases will not be permitted to become appointed representatives.

Higher risk activities will include:

  • Lending, other than where the  organisation’s core business is not financial services and there is no charge for interest or fees
  • Credit broking, other than where credit brokerage is a secondary activity for an organisation whose core business is not financial services
  • Debt counselling and debt adjusting by commercial organisations
  • Debt collection
  • Credit information services
  • Credit reference services
  • Peer-to-peer lending – these lenders may not currently require OFT authorisation, but will come under the FCA regime

Activities classed as lower risk will include:

  • Lending, where the organisation’s core business is not financial services and there is no charge for interest or fees
  • Credit hire
  • Credit broking where brokerage is a secondary activity for an organisation whose core business is not financial services
  • Debt counselling and debt adjusting by not-for-profit bodies
  • Credit information services provided by not-for-profit bodies

Consumer credit organisations should apply for interim permission from the FCA before April 1 2014. After obtaining interim permission, organisations will then need to obtain full FCA authorisation within two years of the switchover. All applicants for FCA authorisation will need to meet their existing threshold conditions, which relate to the organisation’s legal status, business model, financial resources and fitness & propriety.

Once authorised, firms will need to comply with the FCA’s Principles for Business, and with the requirements of the FCA Handbook. The new consumer credit sourcebook in the Handbook will be known as CONC.

Many of the rules firms will need to follow will be based around the Consumer Credit Act and existing OFT guidance. However, there are a series of new requirements that apply to all credit firms, and further new requirements for certain types of firms.

Some of the provisions applicable to all firms include the need to submit data reports to the FCA; and a widening of the definition of an eligible complainant.

Examples of the new requirements for specific business sectors include:

  • Limits on rollovers and use of continuous payment authority by payday lenders.
  • The need for risk warnings on payday loan promotional material
  • More rigorous payday loan affordability checks
  • New prudential requirements and client money handling rules for debt managers

FCA authorisation will not be required for certain members of professional associations, for whom credit is a secondary activity; insolvency practitioners; tracing agents; or cycle to work schemes covered by a group licence. Some organisations will also have the option of becoming an appointed representative – an appointed representative firm does not hold FCA authorisation, but is supervised by another firm which does.