06 August 2013

Consumer credit gets the financial services treatment

The FCA takes over licensing in a whole new style

Any business providing credit to consumers, or introducing sources of credit, needs a consumer credit licence. The requirements and standards have increased gradually since licensing came in back in the 70’s. Back then, almost all applications were granted and hardly any licences were revoked. The OFT has never put much resource into the system and has taken a light-touch approach. That will all change when regulation moves to the financial services regulator, the FCA, in April 2014.[1]

The FCA is a far more demanding regulator. It is used to dealing with large institutions with full-time compliance officers, and the resources to apply detailed, complicated rules. The FCA has the resources to deal effectively with complaints and to make life miserable for those it suspects of transgressions, and it is not known for sympathy with small businesses struggling to comply. Apart from the largest consumer credit businesses, which are already FCA-regulated, consumer credit licence-holders may be in a for a shock.

Until now, the main sanction under consumer credit legislation was the threat that agreements might be unenforceable due to non-compliance. Although a whole industry grew up around this, not many defences based on technicalities were successful. The OFT was unlikely to take action unless the whole business model of the licence-holder was objectionable. The OFT’s expectations were set out in guidance notes, which did not have the force of law.

The FCA has said that it will act very differently. It is used to dealing with individual complaints and sanctioning businesses for isolated non-compliance, as well as looking carefully at the overall suitability of a business. It expects rigid compliance and self-reporting of breaches. Directors and those performing “controlled functions” will be subject to personal sanctions, as they are in other FCA-regulated businesses. The FCA will be translating the OFT’s guidance into enforceable rules. There will also be Principles of Business, High-level Standards and Conduct Standards – in other words, a whole new regulatory environment for businesses to learn and understand.

The FCA does promise some relaxation for lower-risk businesses. Giving deferred payment terms at no cost to buyers of goods and services or introducing them to sources of credit, hiring goods to consumers and not-for-profit debt advice all require licensing at present but are to be the subject of exemptions, and there is to be a new status as authorised representative of an authorised firm, allowing businesses to rely on the compliance of their consumer credit supplier.

All licence-holders have to apply for interim permission from the FCA, with applications stating in September, accompanied by payment of a £350 fee – likely to be the first of many. Full authorisation must be applied for by 2016, and aims to  ensure that regulated firms are well-run, recognise the risks they face and have appropriate strategies, systems and controls in place and the right people in important roles. Individuals who perform key “controlled functions” will be vetted and monitored.

Recommended first steps for licensed businesses are to check that your details are correct on the existing Consumer Credit Register and to sign up to FCA consumer credit emails. Any business contemplated consumer credit activities would do well to apply for an OFT licence before April, as otherwise it will be subject to the full rigours of FCA authorisation.

[1] Financial Services Act 2012 (Consumer Credit) Order 2013

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