There has been a growing use of law firms using consumer credit agreements to fund client’s disbursement fees. Up to the 1st of April 2014, SRA authorised firms could carry on consumer credit activities under an Office of Fair Trading (OFT) group consumer credit licence which was held by the Law Society, and enabled firms to operate without having an individual licence, provided they were overseen by their professional body.
Under the FCA, there is no equivalent group authorisation meaning that firms carrying on regulated consumer credit activities must:
- be authorised by the FCA with the appropriate permission;
- be exempt under the SRA’s arrangements made under Part 20 of the Financial Services and Markets Act 2000 (FSMA); or
- cease to carry on consumer credit activities.[i]
Consequently, firms that are conducting consumer credit activity need to be authorised by the FCA, unless they are an SRA-regulated firm and ensure that their activity satisfies Part 20 of FSMA. Part 20 FSMA allows for a firm to be considered as an Exempt Professional Firm where their engagement in regulated activity “…arises out of, or is complementary to, the provision of a particular professional service to a particular client… ” (s332(4) of FSMA) and the regulated activity “…must be incidental to the provision by him of professional services…” (s327(4) of FSMA).[ii] There are also a number of conditions that must be met in order to be treated as an exempt professional firm, including not receiving any pecuniary reward or other advantage that isn’t accounted for to their client, which arises out of the activities.
To determine whether regulated activities are incidental, the following factors should be considered:
- The scale of the regulated activity in proportion to other professional services provided,
- Whether activities that are regulated activities are held out as separate services and to what extent, and
- The impression given of how a firm provides regulated activities.
If SRA-regulated firms can demonstrate that they fall within Part 20 in relation to consumer credit activities by carrying on the regulated activities in a manner which is incidental to the provision of legal services, and the specific activities arise out of and/or are complementary to the transaction, then they would be regulated solely by the SRA. In this instance, they must then comply with the SRA Financial Services (Scope) Rules 2001 and the SRA Financial Services (Conduct of Business) Rules 2001 (COB Rules).
However, this exemption only applies to SRA regulated firms, and firms that work with such companies need to consider the possibility that they require FCA authorisation. Take, for example, a firm such as a claims management company (CMC) that refers clients to a solicitor that then introduces the client to a lender for a credit agreement (for example to pay for the client’s disbursements); both the solicitor and the CMC could be conducting credit broking particularly where progression of a claim most likely requires the entry into a consumer credit agreement by the claimant. The solicitor may benefit from the Part 20 exemption whilst the CMC would be acting unlawfully if it did not hold authorisation when required to do so.
For the solicitor to benefit from the exemption at Part 20 they must ensure that they meet the criteria and also ensure that it accounts to the client for any pecuniary reward or other advantage which it receives from the third-party lender.
Those firms that are deemed to be conducting activity regulated by the FCA, and do not meet the criteria to be solely regulated by the SRA such as CMCs, must ensure they are authorised or have appropriate status as an appointed representative. All firms regulated by the FCA for credit broking must comply with the FCA handbooks, which includes acting in accordance with the relevant provisions contained the Consumer Credit Sourcebook (CONC), Principles for Business (PRIN) and Senior Management Arrangements, Systems and Controls (SYSC).
Both the CMCs and law firms that are operating consumer credit agreement funding models need to ensure that not only they hold the correct authorisation to carry out the regulated activity, but also any introducers they work with also hold the correct authorisation.
Failure to be authorised for credit broking activity when required amounts to a criminal offence, and the subsequent consumer credit agreements will be unenforceable. Due diligence by all firms in the consumer journey is therefore critically important and is part of firms being able to demonstrate their own compliance. Credit brokers must ensure that their due diligence shows that the lending products provided to consumers they introduce are suitable and in the interests of the consumers. This includes ensuring that correct processes are followed for affordability as well as having robust arrangements in place to manage risks to customers.
[i] Solicitors Regulation Authority – Regulation of consumer credit activities: https://www.sra.org.uk/solicitors/code-of-conduct/financial-services-rules/background.page
[ii] Solicitors Regulation Authority – Regulation of consumer credit activities: https://www.sra.org.uk/solicitors/code-of-conduct/financial-services-rules/background.page
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article