General information, and rules applicable to all credit firms
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.
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.
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
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.
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.
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.
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.
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.
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.”
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.
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.
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 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.
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.
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.
There will also be restrictions on charging upfront fees, with firms required to spread the cost burden over time.
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.
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.
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.
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.
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.