On 6 March 2013, the FSA released its consultation paper CP13/7 CONSUMER CREDIT (the Consultation) and set out some of the structural aspects of the proposed new regime that will be brought into place under the remit of the new Financial Conduct Authority (FCA).
In this short bulletin, we’ll analyse some of the main features of the new regulatory regime and give an overview of how the new structure will look.
The intention is for the Financial Services and Markets Act 2000 (“FSMA”) to replace the provisions of the Consumer Credit Act 1974 (as amended) (“CCA”) relating to licensing and other aspects of regulation and oversight.
The Consultation has made it clear that many provisions of the CCA will remain and will continue to underpin the standards for lending and consumer protection, for e.g., the form and content of consumer credit agreements will remain as set out in secondary legislation under the CCA.
The FCA will create new ‘high level’ rules and guidance governing firms’ behaviour and the controls that they will have to put in place. These will incorporate parts of the current OFT Guidance where appropriate. The FSA is seeking industry views on whether any provisions of the various voluntary codes should part of the FCA rules or guidance.
No consumer credit firms that are not already to be regulated by the Prudential Regulation Authority (PRA) will be brought within the ambit of PRA regulation.
The new framework aims to deliver:
- Increased flexibility the FCA will have rule making powers, including the power to ban products, in order to quickly respond to product and service innovations which may prove harmful to consumers;
- More resources the FCA will have more financial and other resources, which will in large be funded by the industry, to enable it to act on a wider range of issues;
- Early intervention through increased flexibility, access to more information through firm reporting and more pro-active supervision the FCA aims to prevent harm to consumers before it is inflicted;
- Better standards the FCA will better scrutinise higher risk firms and there will be more scrutiny of individual’s integrity and competence when fulfilling key roles in consumer credit businesses. Wider enforcement powers will also encourage better conduct;
- Better access to redress the FCA will have the power to require firms to compensate consumers for losses caused by their actions.
There has been a lot of speculation about whether or not a cap on the variable total cost of credit will be introduced in light of the report produced by the University of Bristol. Thankfully, for the moment at least, this has been abandoned. This has not however been ruled out as a future solution to the activities so heavily criticised in the payday sector and the Government has given the FCA specific power to cap the overall cost of loans, their duration and the amount of times that they can be rolled over.
Minimum Capital Requirements
There has been speculation as to whether or not, like many banks and other deposit taking institutions, consumer credit firms will as part of the new regime be required to hold minimum levels of capital. We now know for certain that they will not, with the exception of Debt Management firms. Why the exception? The FSA considered that there was risk of significant financial harm to consumers if a debt management company, which is holding significant sums of client money due to its debt administration activities, got into financial difficulty. It has therefore decided to impose a minimum capital requirement for those firms.
One theme that is brought up time and time again by those involved in the creation of the new regime is proportionality. By this the FCA asserts that it only wishes to place burden on the sector to the extent that is required in order to provide adequate consumer protection.
The following key features of the new regime aim to deliver this proportionality:
- Reduced requirements for firms carrying out lower risk activities (see below).
- Limited reporting requirements meaning firms will only have to report key information to the FCA. The FCA will concentrate on market wide risks using other information sources, such as intelligence from consumer groups.
- Limited capital requirements, as only debt management firms will be required to hold minimal levels of capital (see above).
- No compensation scheme cover will be deployed from the Financial Services Compensation Scheme (FSCS) for consumer credit businesses, as the FSA considers that there is limited risk to consumers’ money in this sector. The exception is debt management companies, who will be subject to minimum capital requirements and stricter client asset rules.
- Pre-approval of certain key individuals, which will control the integrity and competence of individuals who exert significant influence over a firm’s business.
Lower vs. Higher Risk Activities
There will be limited scrutiny of firms carrying out lower risk activities, such as:
- Retail outlets providing consumer credit like gym services, where there is no interest or other charges levied;
- Consumer hire firms, such as tool hire businesses etc.;
- Credit brokerage by retail firms selling goods on credit as a secondary activity (e.g. car dealerships);
- Not for profit debt counselling and debt adjusting services; and
- Not for profit credit information services.
This means that applications for FCA authorisation for the above activities will be subject to limited scrutiny; though the FCA may deploy all of its regulatory powers of enforcement should it deem it necessary. Such firms will be referred to as having ‘limited permission’. Those firms will only be able to carry out the activities covered by their limited permission but will benefit from a limited supervisory regime too.
- be subject to mainly reactive supervision as opposed to pro-active supervision;
- report only very basic information, such as the number of transactions or revenue; and
- have lower authorisation and annual fees.
Higher risk activities will be everything else, such as lenders making personal loans, credit card lending, credit broking, debt adjusting and debt counselling for commercial gain, debt collection, debt administration, credit information services, credit reference agencies and a new regulated activity of “operating an electronic system in relation to lending” designed to cover the specific activities of peer-to-peer lenders.
A regime for “appointed representatives” akin to that in existence under the FSMA will be introduced for certain types consumer credit businesses. A review of this aspect of the new structure will be published in our bulletin on 11 April 2013.
The Long View
Once the new regime has been put in place, the FSA has signalled an intention by the FCA to continuously review the regime and the protection it affords consumers in more detail and once it begins to develop its expertise in the sector.
Further, the Government has proposed a requirement that by April 2019, the FCA is to provide it with a report on whether the remaining provisions of the CCA should be repealed and replaced by rules. This will be the subject of further consultation.
Summary & Conclusion
In short therefore the key proposals are:
- Stricter conditions of entry for firms and key individuals within firms;
- Pro-active supervision of higher risk firms;
- Wider enforcement powers and improved means of providing redress for consumers;
- Reduced requirements for firms undertaking lower risk activities;
- No immediate rate cap;
- Limited reporting and capital requirements; and
- No FSCS cover for consumers.
So, there you have it, an overview of what will be put in place as from 1 April 2014. The FSA believes that this will make for a proportionate and yet robust system of regulation for consumer credit in the short to medium term. Do you agree?
In our next bulletin to be published on 26 March 2013, we’ll be looking at the timetable for implementation of this new regime and the transitional provisions that the FCA intend to deploy to manage the transition from the OFT.