In the previous bulletin of our series on the proposed new regulatory framework, we covered the interim permission regime and the impending demise of consumer credit licences issued by the OFT. As we mentioned before, it is proposed that the interim permissions will expire altogether by 01 April 2016. By this time of course, all firms bearing an interim permission should have applied for full authorisation if they wish to continue providing regulated consumer credit activities. In the FSA’s consultation paper CP13/7 Consumer Credit (“the Consultation”), it is envisaged that the transfer from the interim to the full regime will begin in the final quarter of 2014. The FCA will be directing firms that have an interim permission or interim variation of permission to apply for full authorisation or variation of permission to the FCA or PRA as appropriate, in stages from 01 October 2014. The FCA will be required to decide whether to grant authorisation within 6 months of receiving a complete application.
Firms wishing to become authorised will need to show that they meet the minimum standards required by the Financial Services and Markets Act 2000 (“FSMA”), which are known as Threshold Conditions (“TCs”). These will apply in respect of all the regulated activities that the firm wishes to conduct. In line with existing FSA regulation, the firms will also need to show that the persons running the firm are ‘fit and proper’ in relation to the roles that they perform.
The Consultation helpfully provides a table of the TCs that are proposed to be in force by April 2014 and how applications for authorisation will be assessed against these standards. Although it is beyond the scope of this article to cite the TCs in full, aside from the usual legal checks on the firm and its staff that one would expect, emphasis has been placed on assessing the business model of the firm and the firm’s capability of being effectively supervised by the FCA. In making this assessment, the complexity of the firm’s regulated activities and products will be taken into account.
The firm will need to show that it has in place adequate financial and staff resources bearing in mind the nature and scale of the business. Furthermore, the competence and ability of the management will be scrutinised to ensure that the interests of consumers and the integrity of the UK financial system are properly safeguarded. Firms will need to submit a detailed business plan which will be assessed against market norms, unless they are applying for authorisation under the ‘limited permission’ regime described below, under which the TCs are to be simplified.
Although the size of the firm will have a bearing on the level of scrutiny that the FCA brings to bear upon its application for authorisation, the FCA has indicated that its approach to proportionality will be governed more by a risk-based assessment which will consider the risks to consumers presented by the firm’s business model.
Lower-risk activities and Limited Permission
Additionally, the Government has identified certain consumer credit activities as posing a lower risk to consumers and proposes that firms carrying on lower-risk activities will face less intrusive authorisation requirements, as we touched upon in our first bulletin in this series.
The lower-risk activities are defined in the Consultation as follows:
- Credit broking as a secondary activity – for example, motor dealerships and high-street retailers that introduce customers to a finance provider;
- Not-for-profit bodies providing debt advice – for example, Citizens Advice;
- Consumer Hire – for example, tool and car hire firms; and
- Consumer Credit Lending – where goods and non-financial services are offered directly to purchasers (except hire purchase or conditional sale) on an interest and charges-free basis – for example, golf clubs or gyms allowing deferred payment for memberships.
The TCs for firms carrying on lower-risk activities will be less onerous than for higher-risk firms, reducing the amount of information that has to be provided. This regime is known as the ‘limited permission’ regime.
Approved persons in consumer credit firms
Following the financial crisis which led to the collapse of Northern Rock, the FSA undertook a radical rethink in terms of its supervisory approach and process. This led to an increased focus on the competence of firms’ senior management and it can be seen from the Consultation that the FCA intends to continue very much in the same vein.
In order to ensure that firms have the right people to fulfil important roles, individuals performing ‘controlled functions’ will be subject to vetting requirements. A controlled function is a function performed for a firm by a person while carrying on a regulated activity. An ‘approved person’ is an individual who will have to be approved by the FCA before they can perform a controlled function.
These requirements appear to be very much in line with existing terminology and practice in the financial services industry. A ‘fit and proper’ test will be carried out to assess among other things:
- the honesty, integrity and reputation;
- competence and capability; and
- financial soundness of the candidate.
The scheme of controlled functions will have a tier within it of ‘significant influence functions’ (“SIFs”). A SIF is defined as ‘a function that is likely to enable the person responsible for its performance to exercise a significant influence on the conduct of the authorised person’s affairs, so far as relating to the activity’. Clearly SIFs apply to the decision makers at firms in positions of regulatory responsibility and include roles such as the director function, or the compliance oversight function.
The proposals in respect of ‘approved persons’ will, unsurprisingly, be focussed in particular on persons within a firm whose responsibilities include a SIF. As with the requirements concerning TCs, it is proposed that firms carrying out low risk activities under the limited permission regime will face less onerous requirements.
Firms will be notified by the FCA if their application for authorisation, limited permission or approval of an individual is to be refused, to give the firm an opportunity to put forward its position prior to a final decision being made. An appeals process will be implemented which allows for a case to be heard in front of an independent committee and then a tribunal.
- Firms will be directed by the FSA to apply for full authorisation in stages beginning 01 October 2014.
- Firms will need to show that they meet the Threshold Conditions set out in FSMA for each regulated activity that they wish to conduct.
- Firms carrying out ‘lower-risk’ activities will be authorised under a ‘limited permission’ regime with less onerous requirements and lower application fees.
- Individuals in key positions in regulated consumer credit firms will need to be authorised under the ‘approved persons’ regime and subject to a ‘fit and proper’ test.
- An appeals process will be available to firms whose authorisation is refused.
In our next bulletin to be published on 11 April 2013, we will be examining the Appointed Representatives Regime, under which a firm can be exempt from authorisation if it is an appointed representative of an authorised firm, which will be of particular interest to small firms carrying on higher-risk credit activities.