In our previous bulletin we looked at the proposed requirements for authorisation by the FCA in respect of firms providing regulated consumer credit activities and the timescale by which firms will be directed to apply for full authorisation. The FSA’s consultation paper CP13/7 Consumer Credit (“the Consultation”) does however propose a route by which a firm which is not a lender may carry on regulated activities and yet be ‘exempt from authorisation’.
A firm may be exempt from authorisation if it is an appointed representative (“AR”) of an authorised firm, known as ‘the principal’. The AR must enter into a contract with the principal under which the principal accepts responsibility for the AR carrying on regulated activities. It is important to appreciate from the outset that as indicated above, the option of being an AR will not be available to lenders.
Becoming an AR is likely to be of most interest to small firms carrying on high risk activities such as credit brokers, who would otherwise bear the full brunt of the proposed new regulatory requirements and the costs involved with authorisation and maintaining the necessary infrastructure, systems and controls needed to be compliant.
It is worth noting that although the Financial Services and Markets Act 2000 (“FSMA”) currently prohibits an authorised firm from being appointed as an AR, the Government is proposing that firms holding a limited permission for lower risk credit activities under the new FCA regulation be allowed to become ARs for other FSMA regulated activities.
The AR regime will of course be of great importance to those lenders who rely on intermediaries to find or deal with customers on their behalf as some credit brokers may only wish to conduct business if they are doing so as an AR, for the reasons set out above. A lender wishing to accept business from an AR will therefore need to consider carefully whether it is happy to take the responsibility involved with being the principal, together with the concomitant requirement to monitor the quality of service being provided by its AR.
The Consultation proposes that a distinction will be drawn, however, between an AR who is merely acting as an introducer to its principal, i.e. an ‘introducer AR’, as compared with an AR who provides advice to customers. An introducer AR will of course be subject to fewer rules than other ARs and will be exempt from the ‘approved persons’ regime we discussed in our last bulletin.
Multi and Single principal agreements
It is also proposed that an AR will have the option to decide whether or not it wishes to deal with just one principal or a number of different principals. It is notable that under a multi-principal agreement, the AR must have a separate agreement with each principal, however there will need to be also an agreement in place between all the principals to the same AR which will provide for dealing with conflicts of interest and how and by whom complaints against the AR will be dealt with. This appears to be in line with existing FSA regulation of ARs, which currently prohibits a firm from unreasonably declining to enter into a multiple principal agreement with any principal of its AR unless relying on a prohibition on the AR from representing any other firms.
Such issues will not of course apply to a single-principal agreement where the AR has only one authorised firm as its principal. Although a single-principal agreement offers less choice for the consumer, it will no doubt prove to be more straightforward from a regulatory viewpoint in that there will be no requirement for an agreement setting out the relationship between different principals and which principal is responsible for any problems arising with the AR. Furthermore, debt collection firms operating as an AR will only be allowed to enter into single-principal agreements so that it is absolutely clear to consumers which lender a debt collector is acting for.
In our next bulletin to be published on 18 April 2013, we will be examining the Principles of Business which establish the principles for behaviour that will be required from firms in respect of all their consumer credit activities under the new regulatory regime. Remember firms have until 1 May 2013 in which to respond to the consultation document with any comments they wish the FCA to take on board. If we can be of any help in formulating such a response, please do not hesitate to get in touch.