Authorisation under the new Consumer Credit regime

Credit where it’s due?

The “brave new world” of consumer credit authorisation

Background

• 1974 – Consumer Credit Act introduced comprehensive system of compulsory licensing. Director General of Fair Trading had power to grant / revoke licenses.

• 2002 – Enterprise Act. Office of Fair Trading officially replaced DG.

• 2006 – Consumer Credit Act. Increased powers/sanctions available to OFT.

• 2012 – Financial Services Act. Financial Conduct Authority & Authorisation replace OFT & Licensing.

Summary

(1)Legislation

(2)Authorisation

(3)Enforcement

Summary

(1)Legislation

(2)Authorisation

(3)Enforcement

Key Legislation

• Financial Services and Markets Act 2000 (“FSMA”)

• Amended by Financial Services Act 2012 (“FSA”)

• Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO 2001”)

• Amended by Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 1013 (“RAO 2013”)

• Consumer Credit Sourcebook (“CONC”)

Structure of FSMA

Part I Establishes the regulator

Part II Prohibits the carrying on of regulated activities by unauthorised persons

Part III Establishes the concept of authorisation and exemption

Part IV Establishes the system of granted permission to carry on “regulated activities”

Part V Provides for regulation by the FCA

Part IX Provides for hearings and appeals

Part X Confers rule making powers on the regulator

Part XIV Sets out disciplinary measures

Part XVI Establishes the Financial Ombudsman Scheme

Part XX Deals with provision of financial services by members of the professions

Part XXVII Provides for giving of notices and creation of criminal offences

Who requires authorisation?

The general prohibition: s. 19(1) FSMA

“No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is-(a)An authorised person; or(b)An exempt person.”

The starting point is that you may not trade - move away from more “inclusive” system established under CCA

What is a regulated activity?

Defined in s. 22(1) FSMA

“An activity is a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by way of a business and-(a) Relates to an investment of a specified kind; or(b) In the case of an activity of a kind which is also

specified for the purposes of this paragraph, is carried on in relation to property of any kind.”

What are activities and investments of a specified kind?

• Dealt with in the statutory instruments• RAO 2001 as (heavily) amended by RAO 2013. Amendments

make RAO 2001 rather ungainly, and a tough read – it was not designed to carry all the consumer credit law it now contains

• Specified activities include:• Entering into regulated credit agreements• Entering into regulated hire agreements• Debt adjusting• Debt counselling• Debt collecting• New category: the operation of an electronic system in

relation to lending• Specified investments include rights under a consumer credit or

consumer hire agreement• The punchline: virtually all consumer credit activities will be

caught, and firms wanting to carry out will require authorisation

Key Changes

CCA 1974, s8:

A consumer credit agreement is an agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides the debtor with credit of any amount.

RAO 2001, art 60B:

(1) Entering into a regulated credit agreement as lender is a specified kind of activity.

…“credit agreement” means an agreement between an individual or relevant recipient of credit (“A”) and any other person (“B”) under which B provides A with credit of any amount;

Definitions – all found in Article 3 of RAO 2001. Many subtle changes. For example…

Impact of the Changes

Two key points to watch out for:1. In a few cases, very slight changes to wording

might mean someone not requiring a license pre-April 2014 would need to be authorised post-April 2014.

2. Much of CCA has been retained – but the two regimes are now jostling for the same space and sit uncomfortably alongside one another. – EG debtor-creditor-supplier relationship central to

liability under s. 75 CCA. – That relationship renamed as borrower-lender-

supplier and definitions of “borrower” and “lender” have changed slightly.

– Unclear how will affect remaining provisions of CCA.

Summary

(1)Legislation

(2)Authorisation

(3)Enforcement

Summary

(1)Legislation

(2)Authorisation

(3)Enforcement

Authorisation

• All pre-existing licenses lapsed on 31 March 2014; unless they applied for interim permission pre-31 March 2014, businesses may not trade

• Otherwise, permission procedure set out from s.55U FSMA

• Some practical guidance from FCA in form of online guides: for consumer credit firms http://www.fca.org.uk/firms/firm-types/consumer-credit/authorisation/prepare

• If permission decision disputed, right to refer to tribunal has been preserved (s.55Z3 FSMA)

Key Changes

Three key changes:

1. Two-track system– Low-risk and high-risk activities require different applications– Virtually all consumer credit business will be categorised as

high risk

2. Authorisation applies to key personnel, as well as business entity

– Greater scrutiny of individuals = more involvement by regulator

– More expense for businesses – likely to need more resources and better management information

– Purposefully designed to be onerous & drive some less popular business models (eg payday lenders) from market

Key Changes

3. Shift from “as of right” approach to more discretion to be exercised by regulator– Under s. 25(1) CCA, OFT had to be satisfied that

applicant for license was “fit & proper person.” If satisfied, OFT had no choice but to grant license

– So limited discretion / assumption that businesses entitled to license “as of right” - inclusive approach

– Under s.41 FSMA, applicants need to satisfy all threshold conditions.

– Of those conditions, “suitability” is a re-hashed “fit and proper” person test, drawn widely & with no real restrictions on discretion FCA may exercise

Summary

(1)Legislation

(2)Authorisation

(3)Enforcement

Summary

(1)Legislation

(2)Authorisation

(3)Enforcement

Enforcement

• Breach of the General Prohibition is a criminal offence: s. 23 FSMA

• Power of regulator to impose penalties of such amount as it deems appropriate if satisfied that:

“(a) a person (“P”) has at any time performed a controlled function without approval, and(b) At that time P knew, or could reasonable be expected to have known, that P was performing a controlled function without approval.”

Some Other Regulatory Sanctions

• Person guilty of misconduct AND regulator satisfied that it is appropriate to take action (s. 66(1) FSMA)

• Regulator may:• Impose penalties• Suspend approval• Impose limitations• Publish statement of the misconduct

Key Changes

Major sea-change from focus on unenforceability of agreements to FCA sanctions:• Under CCA, unenforceable agreements provisions

incentivised consumers to litigate in hope of debt being written off

• Under FSMA, fewer sanctions linked to unenforceability

• Much more focus on sanctions imposed by regulator and on lenders’ relationship with “public at large” rather than with individual borrowers

• FCA has made clear that it, and not consumers, will bear brunt of taking industry to task

CONC

• Radical shift from prescriptive approach of CCA to broader, principles-based regulation (e.g. TCF, fair/clear/not misleading)

• Unwelcome lack of clarity / certainty – instead traders much more at the mercy of the FCA’s discretion

• Particularly concerning for lenders where focus is on sanctions rather than unenforceability – risk is not merely of debts being written off, but of permission being revoked & lender consequently being unable to trade

• Leaves FCA susceptible to politicisation and reactive change

Headlines

1. Minor changes may turn out to be major changes – check wording carefully

2. FCA now afforded wide discretion3. More onerous system will require more

resourcing by traders4. Focus on sanctions5. It will be a bumpy ride – manage client

expectations

Henderson Chambers2 Harcourt Buildings

TempleLondon EC4Y 9DB

Tel: 020 7583 [email protected]

www.hendersonchambers.co.uk

©

Rachel Tandy and Thomas Evans29 May 2014

2014, Rachel Tandy and Thomas Evans