OpinionMay 9 2013

FCA set to take control of consumer credit

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Firms offering credit to consumers are currently licensed by the Office of Fair Trading. However, in March the government and the FSA published proposals to transfer the responsibility for consumer credit regulation away from the OFT to the Financial Conduct Authority.

The significance of the proposals should not be underestimated by firms carrying on consumer credit business (including businesses providing loans, overdrafts, debt collection, credit intermediaries and debt advisers). In particular, the changes will establish a conduct of business regime which, for the first time, regulates all significant areas of retail financial services including consumer credit.

The government has stated that it has two guiding principles when it comes to transferring the consumer credit regime. First, consumers should be better protected. Second, the regulatory regime should be proportionate to the types of firms and risks posed by them. The FCA will undoubtedly be a tougher and more proactive regulator than either the FSA or the OFT.

Under the proposals OFT licences will expire on 31 March 2014. By this date all licensed firms will need to notify the FCA that they want an ‘interim permission’ and pay a fee. The FCA may ask firms for other types of information on a voluntary basis, such as turnover, complaints information, number and location of branches and transaction information. On 1 April 2014, firms which currently hold consumer credit licences with the OFT will transfer to the FCA regime. A firm’s interim permission will be valid until 1 April 2016. By that date every firm with an interim permission will need to apply for, and obtain, full FCA authorisation.

An important point to note is that firms will need to meet certain threshold conditions and minimum standards set out in the Financial Services and Markets Act 2000. In assessing whether a firm meets these, the FCA proposed that they will be modified for firms undertaking “lower-risk regulated activities”.

The distinction between lower and higher-risk regulated activities will be an important distinction in the new regime. Firms undertaking lower-risk activities will hold limited permissions and be subject to a more restrictive regulatory regime but will be required to provide significantly less information to the FCA than those firms conducting higher-risk activities.

Activities that will be deemed to be lower-risk include:

• Lending activities where a firm’s main business is to sell goods and non-financial services, if there is no interest or charges payable on that credit.

• Credit broking whereby a firm’s credit activities is a secondary activity to selling goods and non-financial services.

• Consumer hire where goods, such as cars, are hired to consumers will be a lower risk activity.

Higher-risk activities include: