Consumer credit regulation under the FCA

The world for those firms that offer credit to consumers (including businesses providing loans, overdrafts, debt collection, credit intermediaries and debt advisers) is soon to be turned upside down. In March, the Government and the FSA published proposals in Consultation Paper 13/7 which are designed to transfer the responsibility for consumer credit regulation from the Office of Fair Trading (OFT) to the FCA.

Timing

On 1 April 2014, an interim permission regime will operate. Consumer credit firms will only be able to carry on activities under their existing OFT consumer credit licence following prior notification to the FCA. The interim permission regime will then expire on 1 April 2016. By this time every firm with an interim permission will need to apply for, and obtain, full authorisation from the FCA.

Threshold conditions

A key issue concerning the FCA consumer credit regime will be the standards that firms are expected to meet. Like other regulated firms consumer credit firms will be expected to meet the threshold conditions set under the Financial Services and Markets Act 2000. However, the FCA is proposing a two tiered approach for meeting these obligations.

Firms undertaking “lower-risk regulated activities” will be subject to the threshold conditions but in a modified form. They will hold limited permissions, be subject to a more restrictive supervisory approach whilst having to provide the FCA with significantly less information than those firms that conduct higher risk activities. Lower risk activities include consumer credit lending where the main business is selling goods and non-financial services and there is no interest or charges and consumer hire.

Firms conducting “higher risk regulated activities” will be subject to the threshold conditions in full. Higher risk activities include debt collection, consumer credit lending (excluding lending by sellers of goods and non-financial services where there is no interest or charges) and credit broking (including introducing consumers to lenders).

Approved persons regime

The approved persons regime will also apply.

Currently, the OFT monitors a licence holder’s fitness to hold a consumer credit licence and this includes taking into account the conduct of the firm’s employees, agents and controllers. Personnel carrying on controlled functions in consumer credit firms will need FCA approval and become approved persons by 2016. This will be something new for the consumer credit industry with senior management being personally liable for their actions.

Financial crime

Financial crime is another area where consumer credit firms will need to pay attention. The FCA has proposed to implement the same general requirement on consumer credit firms to tackle financial crime as currently applies to existing FCA regulated firms. The FCA believes that this will be a substantial step up for some consumer credit firms.

Steps to get ready for the FCA regime

It appears that consumer credit firms have much work to do in order to make themselves ready for the new FCA regime. There are a number of steps that such firms should be taking including:

scope out the extent of the consumer credit activities that your firm currently undertakes and assess whether they are lower-risk or higher risk activities;
read FSA Consultation Paper 13/7 which contains the proposals for reform and map how they will impact your firm’s current systems and processes;
consider in particular the FCA’s proposals for conduct standards noting specific standards for certain activities including those relating to debt advice and firms holding client assets;
consider your firm’s systems and controls to prevent financial crime;
ensure that information is at hand to complete the FCA notification for interim permission including having up-to-date and accurate information of your firm’s controllers as recorded by the OFT and consider voluntary disclosure of other information including complaints information;
review the roles of key personnel and assess who will be classified as an approved person. Remember that the FCA will vet individuals who will perform controlled functions to ensure they are up to the job; and
sign up to the FCA’s email updates on consumer credit reform.