UK: FCA Regime For Consumer Credit High Level Proposals

The FSA published its proposed approach to consumer credit regulation on 6 March. The Consultation Paper (CP13/7) sets out the approach the FCA intends to adopt for the regulation of this activity when it transitions from the Office of Fair Trading (OFT) on 1 April 2014. This will affect both existing regulated entities such as banks and building societies, but will also bring into regulation a number of other types of firm which are involved in the provision of finance to consumers. This paper was released on the same day as the OFT's report into payday lending, which provoked a large amount of media interest, and the HM Treasury/Department for Business, Innovation & Skills consultation, 'A new approach to financial regulation', which sets out the draft statutory instruments in this area.

The specific interim provisions detailed within the CP include the below:

  • Existing firms will need to notify the FCA prior to 1 April 2014 (expected from autumn/winter 2013) that they wish to continue their activities. They will be given interim permission or, in the case of existing FCA/Prudential Regulation Authority (PRA) regulated firms, interim variation of permission.
  • Interim permission is expected to run until 1 April 2016 at the latest.
  • Firms will need to submit an application for full authorisation or variation of permission by a date to be set in a direction from the FCA.
  • The FCA proposes to issue such directions in stages, based on categories of firms, from 1 October 2014.
  • The Approved Persons regime will apply to consumer credit firms from full authorisation only.
  • Firms can become appointed representative if appropriate but only if their principal firm is fully authorised for credit activities.
  • There will be on-going reporting requirements from full authorisation only.
  • Capital requirements will only be set for debt- management firms and applicable from full authorisation.

Conduct rules will be in place from 1 April 2014 for all firms with the new FCA rules and guidance largely replicating the existing Consumer Credit Act (CCA) provisions and OFT guidance. Details of the exact rules will be in a further CP expected this autumn. Firms will have six months to 'accustom' themselves to these, essentially to make administrative changes e.g. updating references in compliance manuals, rather than to set up new procedures to demonstrate compliance. The CP acknowledges that the FCA cannot take enforcement retrospectively but will look at past behaviour and apply the sanctions that were in force at the time so misconduct prior to 1 April 2014 will be investigated by the FCA and fines will be based on what could be have been imposed under the CCA.

The FCA's 'Principles for Businesses' will also apply to consumer credit firms from 1 April 2014. Clearly banks should have strong governance and risk management frameworks in place prior to transition but they will need to ensure consumer credit activities are fully included.

It is clear from the proposal that the regulator expects all firms that currently hold a consumer credit licence to be in compliance with the existing rules and guidance. We see the key issue for firms as being their ability to evidence compliance with the existing regime.

There was immense pressure on the FSA from consumer groups and the government to take action against poor practices in the consumer credit industry and consequently, it is vital for Boards and senior management to be able to demonstrate that they have good oversight over the firm's business activities and robust monitoring procedures. Whilst payday lenders will be high on the FCA's agenda we believe they will also want to focus on banks as major players in consumer credit.

For supervision purposes, firms will be categorised according to their potential impact on the FCA's objectives. Firms with a large number of retail customers are expected to have a nominated supervisor with smaller firms supervised by a team of sector specialists. Supervision whilst firms have interim permission will be mostly 'event driven' and 'issue-based'. This interim period will also be used by the FCA to conduct 'firm familiarisation work' with the most significant firms to understand their business models and their impact on the market. The FCA will take action if it finds misconduct during this work.

Whilst it is probable that many banks already extend their governance and compliance activities to encompass consumer credit activities, some specific areas for consideration could include:

  • The ability to demonstrate compliance with existing regulations and OFT guidance. This may involve reviewing sales processes; ensuring charging structures are simple and transparent to consumers; checking that the granting of unauthorised overdrafts and credit card rollovers are in compliance with existing regulations; looking at debt recovery processes and any interaction with newly regulated debt management firms; and ensuring there are sufficient records to enable the FCA to monitor compliance.
  • The impact of FCA relationship management for consumer credit activities. Past interaction with the OFT has been limited whereas the FCA is looking at a stronger supervision and enforcement approach with powers of redress.
  • Additional reporting requirements from full authorisation - possibly transaction reporting, reporting of breaches.
  • Updating status disclosures in agreements etc.
  • Financial promotions – any impact of the new rules which will be introduced following concerns around high-cost credit products.
  • Consideration of additional approved persons (detailed rules to be set in the autumn CP).
  • The reaction of any intermediaries and distributors unused to the new regime.

The deadline for responses to this CP is the end of May 2013. The FCA is specifically looking for feedback on whether any existing industry codes should be included in the rules.

There will be a second CP, which is expected in the autumn, giving more detail of specific Conduct Rules and how CCA and OFT rules and guidance will be integrated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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