FCA sets out its vision for the regulation of consumer credit

The Financial Conduct Authority (FCA) has set out a detailed regime which is aimed at providing stronger protection and better outcomes for consumers and will replace the existing OFT regime.

Financial Conduct Authority regulation will apply to any firm selling goods or services on credit (amongst other types of business previously holding a licence under the OFT regime). Critically, it will also apply to businesses that engage in debt collection activities on behalf of lenders; which is defined as a ‘high risk’ activity and will be subject to additional scrutiny.

The change in regulation will see the Financial Conduct Authority take on responsibility for more than 50,000 firms who have existing credit licences. The consultation is open until 3 December 2013 and the Financial Conduct Authority will publish its final rules and guidance in February 2014.

The Financial Conduct Authority wants to ensure that consumers are given enough information to make informed choices, that the market is competitive and offers loans that meet customer needs, and that those in difficulty are treated fairly. The key elements of the proposed consumer credit regime are:

  • Affordability checks for every credit agreement to ensure that only consumers that can afford a loan can get a loan
  • All advertisements and other promotions must be clear, fair and not misleading. The Financial Conduct Authority will be able to ban misleading adverts
  • Firms that do higher risk business and pose a greater risk to consumers will face a tougher supervisory approach
  • Consumers will continue to have access to the Financial Ombudsman Service
  • A robust authorisation gateway to ensure that any firm or individual authorised to do consumer credit business is fit and proper, and that firms have suitable and sustainable business models
  • Dedicated supervision and enforcement teams will crack down on poor practice, money laundering and unauthorised business. Firms that break the rules may face detailed investigations and tough fines

The Financial Conduct Authority is inviting all interested parties to provide feedback to the consultation so the final measures strike the right balance between consumer protection and allowing businesses to function.

A new rulebook, the Consumer Credit Sourcebook, will contain the new rules and guidance of the Financial Conduct Authority’s regime. Included will be existing OFT standards that the Financial Conduct Authority will carry across, turn into Financial Conduct Authority rules and guidance, and be able to enforce upon.

Although the new rules come into effect in April 2014, the Financial Conduct Authority will not enforce rule breaches before 1 October 2014 providing firms can show that they have acted in line with existing OFT guidance or other existing legislation.

The Financial Conduct Authority has referred to this as a “once in a generation change in regulation”.


Commentary

Adam Wonnacott

We see this as a definitive and positive step forward for the industry and something that will benefit lenders and their customers.

We realise that debt collection (and in particular field debt collection) is a high risk activity and that the ability to carry out this function should be restricted to businesses that can demonstrate the required level of competency and sustainability.

The Financial Conduct Authority proposals recognise certain weaknesses in the current OFT licensing regime. In our industry, this has meant that a licensed business can engage third-party field collectors without taking active responsibility for ensuring that they are ‘fit and proper’ persons. The Financial Conduct Authority proposals will address this by introducing the concept of Appointed Representatives (‘ARs’). The Principal Authorised Business will need to keep the Financial Conduct Authority notified of who their ARs are and will need to report to the FCA, where appropriate, on the activities of those ARs.

At all times the Principal must have adequate controls and resources to ensure that its AR(s) are fully compliant. For example, the Principal will be responsible for ensuring that its AR(s), at the time of appointment and on an ongoing basis, are ‘fit and proper’ to deal with customers.

It will no longer be possible for businesses operating in the field debt collection industry to engage sub-contractors on an ‘ad hoc’ basis. All authorised businesses will need to take responsibility for the continuing professional development of ARs and background checks.

We feel that these proposals will help to ‘level the playing field’ across all operators in the debt collection/enforcement sector. The new Financial Conduct Authority regime will give lenders and their customers the confidence that they might expect when dealing with a regulated business, rather than merely a licensed business.