The regulation of consumer credit will soon transfer from the Office of Fair Trading (the OFT) to the Financial Conduct Authority (FCA) on 1 April 2014 and is arguably the most significant change in the way that consumer credit is regulated since the introduction of the Consumer Credit Act 1974 (the CCA).
The FCA has recently published guidance concerning its approach to enforcement in the consumer credit regime. Most of the rules and guidance in the FCA’s new consumer credit sourcebook (referred to as CONC) come into effect from 1 April; however, the enforcement of some of the rules and guidance are subject to a six-month transitional period. Consumer credit firms will also need to consider the wider FCA Handbook and the various legal and regulatory implications this will have; as well as noting that the CCA is not being entirely extinguished in its current form.
The guidance explains that from 1 April consumer credit firms must comply with the Financial Services and Markets Act 2000 (FSMA) and existing FCA Handbook rules. Most FCA rules in CONC are enforceable from 1 April regarding events occurring after 1 April (the rules are not retrospective). Most, but not all, FCA rules in CONC are also subject to a six-month transitional provision for the period 1 April to 30 September 2014. The terms of this six-month transitional provision (i.e. that firms must comply with the FCA rules in CONC unless they can demonstrate compliance with: a ‘corresponding rule’, that is a provision in specified OFT guidance, specified provisions of the CCA or certain CCA regulations; that is substantially similar in purpose and effect to the FCA rule in CONC to which it relates) gives firms time to get accustomed to the new structure and style of CONC. However, crucially, “non-compliance is not an option at any time”.
It is worth mentioning that the FCA’s Principles for Businesses will apply to all authorised consumer credit firms and those with limited permission from 1 April (including those firms with interim permission). Consumer credit firms will for the first time have a single set of rules setting out the broad parameters of expected behaviour. Most notable here is the requirement under Principle 11 for firms to deal with its regulators in an open and cooperative way. Furthermore, consumer credit firms will be subject to the vast range of information gathering powers given to the FCA under FSMA (including information requests and Skilled Persons’ reports).
In practical terms, consumer credit firms should take note of Tracey McDermott’s keynote address: ‘Financial crime in the FCA world’ published on 1 July 2013, which considers how the FCA will continue to tackle financial crime, and the impact this will have on consumer credit businesses. The significant point made in the keynote address is that the FCA has identified that by potentially imposing the same general requirements on consumer credit firms as currently applies to firms it already regulates today, this will be a substantial step up from what is required of some consumer credit firms now. What this suggests is, potentially, a seismic shift in the way consumer credit firms will experience regulatory intervention from the FCA.
Given that one of the FCA’s objectives is to ensure the integrity of the markets, a key part of that is ensuring that firms understand, and manage, the regulatory risks that they face. Tracey McDermott in her keynote address goes further to say that not only is it a big challenge in addressing unauthorised activity, but that standards in legitimate operators in the consumer credit sector may also often fall short of the FCA’s expectations. For example, the FCA has indicated that the financial crime risks in the consumer credit sector are substantial; and it feels that at the fringes of the consumer credit market there is much illegal and fraudulent behaviour.
Consumer credit firms should therefore expect to see (and heed) calls for tighter systems and controls in the way they operate and provide for the protection of consumers – one of the FCA’s operational objectives. With this in mind, in its key consultation paper on consumer credit reform (CP13/10), the FCA noted that it will employ its Firm Systemic Framework (or ‘FSF’) approach to consumer credit firms to assess their conduct risks and enable it to come to a view about the extent to which the firm embeds fair treatment of customers and market integrity in the way it is run. Further, in CP13/10 the FCA has said it expects the vast majority of consumer credit firms to be classified as smaller, ‘C4’ firms or ‘flexible portfolio’, which means that they will be supervised by a team of sector specialists and not have a dedicated supervisor. Practically, therefore, the FCA is likely to employ regulatory tools such as thematic visits or self-attestation (a signed statement from a firm which confirms effective governance), which will certainly be a change in the regulatory relationship these firms have traditionally experienced with the OFT.
For a large number of consumer credit firms, the FCA’s robust approach will present a number of new legal and regulatory challenges to their current business models. Importantly, consumer credit firms are likely to come under increasing regulatory scrutiny, requiring senior management to take the lead in embedding a robust compliance culture across a firm, from the top down. In light of the FCA’s recent trend in awarding record fines for conduct breaches, consumer credit firms should pay close attention to exactly how the FCA will be policing their businesses from 1 April.
This article first appeared in Complinet.