This series of bulletins has been examining the FSA’s proposals for FCA regulation of the consumer credit industry as put forward in their consultation paper CP13/7 Consumer Credit (“the Consultation”). Having looked previously at the proposed timescale and transitional arrangements, the requirements for firms seeking to be authorised, and the status of appointed representatives who will be exempt from authorisation, we now turn to the fundamental obligations of firms under the FCA regime, known as the Principles for Businesses (“the Principles”).
The Principles for Businesses
The Principles as set out below are high-level rules that set out the overarching standards that firms must meet and are intended to provide a ‘belt and braces’ approach, to ensure that firms comply not just with the letter of the rules but the spirit of the wider regime. They will need to be complied with at all times, even for e.g. when a firm provides generic advice, which is not a regulated activity and the FCA will be able to take enforcement action if they are breached. The Principles already apply to FSA regulated firms and in the Consultation it is proposed that they be applied from 01 April 2014 to all authorised consumer credit firms including those with limited permission.
1 Integrity – A firm must conduct its business with integrity.
2 Skill, care and diligence – A firm must conduct its business with due skill, care and diligence.
3 Management and control – A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
4 Financial prudence – A firm must maintain adequate financial resources.
5 Market conduct – A firm must observe proper standards of market conduct.
6 Customers’ interests – A firm must pay due regard to the interests of its customers and treat them fairly.
7 Communications with clients – A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
8 Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
9 Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
10 Clients’ assets – A firm must arrange adequate protection for clients’ assets when it is responsible for them.
11 Relations with regulators – A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice.
Plus ça change, plus c’est la même chose?*
Firms seeking authorisation under the proposed new regime will understandably be concerned to know the degree of change which will be imposed upon them as a result of the shift of regulation from the OFT to the FCA. In respect of the Principles, clearly there are some parallels that can be drawn with the current CCA regime regulated by the OFT. For example, under Principle 6, a firm must treat its customers fairly, whereas the OFT’s Irresponsible Lending Guidance outlines overarching principles of consumer protection and fair business practice which require ‘fair treatment of borrowers’.
The requirements of the Principles will lead inevitably to certain changes however, as they do not have a direct counterpart in the existing CCA regime. The key areas of difference highlighted by the FSA in the Consultation as likely to make most impact on firms are the requirement for ‘adequate risk management systems’ (Principle 3), to maintain ‘adequate financial resources’ (Principle 4) and the broader requirements on communications with clients (Principle 7) and relations with the regulator (Principle 11).
It is important also to appreciate that the Principles are a set of binding rules, whereas some of the similar provisions in the CCA regime are OFT guidance (albeit taken into account on decisions on fitness). This means that the FCA will have stronger sanctions available to it than the OFT currently has to punish breaches.
Notwithstanding what is set out above, the Consultation suggests that in the FSA’s view, the large areas of similarity between the two regimes will mean that there will be little change introduced by the Principles for firms which are already compliant under the CCA regime. Conversely, pro-active supervision by the FCA will lead to more robust enforcement action ensuing against those which are not.
When will the new rules apply?
The FCA will consult on draft detailed conduct rules in the autumn of 2013, with a view that such rules and guidance will come into force in April 2014. The FCA intends however to give the industry a six month transitional period in order to get to grips with the new style and structure of regulation. During that six month period, provided firms can show that they are compliant with the old OFT standards, it will not take any enforcement action against them in relation to the corresponding new rules (which they say will be substantially the same).
In our next article in this series we will be looking at the FCA’s proposed approach to supervision, which is different from the OFT’s current practice in various ways. We will also examine the FCA’s proposed reporting requirements in respect of the consumer credit sector. Remember firms have until 1 May 2013 in which to submit any comments to the FCA they may have in relation to the Consultation.
*The more things change, the more they stay the same.