Government and FSA consult on transferring consumer credit regulation to the FCA

Practical Law UK Legal Update 8-524-9614 (Approx. 10 pages)

Government and FSA consult on transferring consumer credit regulation to the FCA

by PLC Financial Services

Draft legislation and regulation

Annex C to the government consultation contains two draft statutory instruments relating to the transfer of consumer credit:

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order (RAO Amendment Order). As well as containing amendments to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO), the draft Order contains amendments to other legislation, including:
- FSMA;
- the CCA;
- the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO); and
- the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 (SI 2001/1217) (Appointed Representatives Regulations).
The aim of the draft RAO Amendment Order is to make the necessary changes to primary and secondary legislation to bring credit-related activities within the scope of FCA regulation.
The Financial Services Act 2012 (Consumer Credit) Order 2013 (Consumer Credit Order). Among other things the draft Consumer Credit Order applies the FCA's enforcement toolkit to retained parts of the CCA and makes a number of changes to the CCA to reflect the transfer of regulatory responsibilities.

Appendix 1 to CP13/7 contains a draft FCA and PRA handbook instrument, the Consumer Credit (High-level Standards and Interim Regime) Instrument 2013. This contains draft rules relating to the high level standards of the FCA and the PRA, as well as rules relating to fees for interim permissions.

More detailed rules will be set out in the FCA's second consultation, to be published in autumn 2013 (see Conduct requirements and rules and Next steps below).

Scope of consumer credit regulation under FSMA

Although the scope of consumer credit regulation will be broadly the same under the new FSMA regime, the government does intend to make certain changes relating to issues including:

The extent to which the activities of peer-to-peer (P2P) platforms are regulated will change and there will be a new regulated activity of operating a P2P platform.
The activity of tracing debtors as carried out by third party tracing agents will be exempt from regulation.
The definition of operating a credit reference agency will be narrowed.

The RAO Amendment Order sets out amendments to the RAO relating to the following new specified activities:

Credit broking (new article 36A, RAO).
Operating an electronic system in relation to trading (new article 36G, RAO). This relates to the operation of P2P platforms.
Activities relating to debt:
- debt adjusting (new article 39D, RAO);
- debt-counselling (new article 39E, RAO);
- debt-collecting (new article 39F, RAO); and
- debt administration (new article 39G, RAO).
Activities relating to regulated credit agreements (new article 60B, RAO).
Activities relating to regulated consumer hire agreements (new article 60N, RAO).
Providing credit information services (new article 89A, RAO).
Providing credit references (new article 89B, RAO).

The government does not intend to make effecting an introduction to debt advice (which would apply to lead generators) a regulated activity as at April 2014.

The scope of new article 60B of the RAO will include second charge lending. The regulation of second charge lending will also transfer to the FCA on 1 April 2014. Annex 7 to CP13/7 sets out information on the FSA's proposals for second charge loans.

In CP13/7, the FSA confirms that no new firms will be brought within the scope of the Prudential Regulation Authority (PRA) as a result of the transfer of consumer credit.

Interim permissions

The government will introduce an interim permission regime, intended to enable firms to transfer to the FSMA regime and adapt to the new regime before seeking full authorisation at a future date. This will mean that firms will not need to be fully authorised before 1 April 2014.

The draft RAO Amendment Order sets out arrangements for an interim permissions regime. Any person who holds a current individual OFT licence but is not authorised under FSMA for non-credit activity will be granted an interim Part 4A permission under FSMA if they:

Notify the FCA of their wish to obtain an interim permission by the specified period and supply the information the FCA asks for by the required deadline and in the prescribed form.
Pay the fee required by the FCA.
Hold a valid licence that is not suspended immediately before the transfer.

Any firm already authorised by the FSA for non-credit related activity will need to notify the FCA and, after paying a fee, will receive an interim variation of permission.

Interim permissions and interim variations of permission will only be granted for activities for which a person is licensed at 31 March 2014.

An interim permission, or interim variation of permission, will remain in effect until a date specified by the FCA by which firms must apply for full authorisation (or variation) or, where no date is specified, 1 April 2016.

Chapter 3 of CP13/7 sets out detailed information on how the FSA anticipates the interim permissions regime will operate.

Authorisations

The government intends to take a "tiered and risk-based" approach to authorisations in the consumer credit sector. The government consultation divides consumer credit firms into two tiers:

Tier 1: the "core credit model". Firms whose activities are deemed to be high risk (which will be the majority of current consumer credit licence holders) will be subject to the FCA's core credit authorisation regime. They will be required to demonstrate that they can meet all of the FCA's threshold conditions at the time of application and on an ongoing basis in order to become authorised.
Tier 2: the "limited permission regime". This tier is aimed at firms that are deemed to be at lower risk, including firms for whom credit provision is secondary to their core (non-financial) activities. Although these firms will still need to be FCA-authorised, the threshold conditions and other requirements will be less onerous. The flexibility allowed under FSMA, as amended by the FS Act, for a consumer credit firm to be an appointed representative will only apply to firms authorised under the limited permission regime.

In CP13/7, the FSA sets out details of the higher-risk and lower-risk activities mentioned in the government consultation. The lower risk activities are stated to be:

Consumer credit lending.
Consumer hire.
Secondary credit broking.
Not-for-profit debt counselling and debt adjusting.
Not-for-profit credit information services.

Firms with limited permissions will be subject to mainly reactive supervisions, will be required to report only basic information and will have lower authorisation and annual fees.

The government consultation sets out the government's approach to the different types of entities that currently hold group licences under the CCA. These persons will have to be individually authorised, to become en appointed representative, to come within the Part 20 FSMA regime for members of designated professional bodes or cease to carry on credit-related activities.

Chapter 4 of CP13/7 sets out detailed information on how the FSA anticipates the authorisations regime will operate, with chapter 5 setting out the alternatives to authorisation (such as the regimes relating to appointed representatives, self-employed agents and exempt professional firms). The FSA expects that the transfer from the interim permission regime to the full regime should start in the final quarter of 2014.

Conduct requirements and rules

Transfer of CCA conduct requirements to the FCA rulebook

The existing conduct standards set out in the CCA and in OFT guidance will continue to form the core of consumer credit regulation. The government believes that, where possible, conduct requirements should be set out in rules, rather than in legislation. The FCA will replicate in rules those provisions of the CCA relating to conduct that will be repealed. Annex B to the government consultation sets out those provisions of the CCA that the government intends to repeal and move to the FCA rulebook.

The government will retain certain consumer rights and protections in the CCA where they cannot be replicated easily under FSMA. These include specific rights for consumers or other non-authorised persons and the provisions to which unenforceability conditions apply. In the long term the government intends for these provisions to be replaced by rules. The FCA will be required under the RAO Amendment Order to review by 2019 retained CCA conduct requirements and to develop rule-based alternatives where possible. Annex B to the government consultation sets out which parts of the CCA will be carried forward in 2014 on an interim basis and which will be subject to the FCA's review by 2019.

FCA approach to conduct standards and rules

Chapter 7 of CP13/7 sets out the FCA's likely approach to conduct standards and rules. It proposes that there should be a tiered framework of high-level standards and more detailed conduct standards, consisting of:

The Principles for Businesses.
Other high-level standards, including systems and controls rules and general provisions (including regulatory disclosures).
Conduct standards, based on conduct standards in the CCA and in OFT guidance. The FCA will include draft rules and guidance in the consultation paper to be published in autumn 2013 (see Next steps below). This consultation may also include proposals for incorporating existing industry codes into the FCA rulebook.

Chapter 8 of CP13/7 sets out specific standards of conduct for firms carrying on specific credit activities, including:

Firms providing debt advice, including not-for-profit debt advice firms.
Firms that hold client assets.
P2P lending platforms.
Firms that outsource the tracing of debtors to third party tracing agents.

Financial promotions rules

The government intends to repeal CCA requirements relating to advertising with effect from 1 April 2014, including section 44 of the CCA on the form and content of consumer credit adverts. These rules will be replicated as part of the FCA's financial promotions regime. Consumer credit firms will be subject to the FSMA financial promotions regimes and all credit activities will be made controlled activities for the purposes of financial promotion.

Payday lending rules

In CP13/7, the FSA states that the FCA intends to take a robust approach to tackling problems in the payday lending sector, following the government's response to the University of Bristol's research on this sector.This may mean new rules taking effect at or around 1 April 2014.

FCA approach to supervision

Prudential requirements

In CP13/7, the FSA states that, with the exception of debt management firms, the FCA does not intend to specify minimum levels of capital that consumer credit firms must hold.

Debt management firms will be subject to prudential standards because the FSA considers that they pose a high risk to consumers because they may hold or control client money (that is, debt repayments) before passing that money on to customers' creditors. Chapter 6 of CP13/7 sets out the FCA's proposed prudential requirements for debt management firms.

Supervision and reporting

Chapter 9 of CP13/7 sets out the FCA's likely approach to the supervision of consumer credit firms and, in particular, how it will apply its general approach to supervision to these firms, including the firm-systematic framework. For more information on the FCA's general approach to supervision, see Practice note, New UK regulatory structure: FCA supervisory model.

Chapter 9 also contains details on the FCA's approach to prudential supervision and to regulatory reporting.

Enforcement

The FCA enforcement regime will be stronger than the existing powers available to the OFT. The draft CCA Order contains provisions relating to:

The FCA's enforcement toolkit. As well as sanctions provided for in the CCA, the FCA will be able to apply the full range of its enforcement powers and sanctions in enforcing the CCA.
Criminal offences in the CCA. The government intends to repeal some criminal offences in the CCA where it believes that the FCA's enforcement powers act as a suitable deterrent although a small number of criminal offences will be retained.

Chapter 10 of CP13/7 sets out the FSA's expectations of the FCA's approach to enforcement actions, including enforcing breaches of the Money Laundering Regulations 2007 (SI 2007/2157) (MLRs). The FCA will review its Enforcement Guide (EG) and its Decision Procedure and Penalties manual (DEPP) to take account of its new powers.

Redress

The credit jurisdiction of the Financial Ombudsman Service (FOS) will be removed and instead credit-related activities will be subject to the FOS' compulsory jurisdiction.

Chapter 11 of CP13/7 sets out more information on redress issues, including the jurisdiction of the FOS. Among other things, it states that the FSA does not consider there should be cover under the Financial Services Compensation Scheme (FSCS) for consumer credit activities.

Financial crime

Chapter 12 of CP13/7 sets out the FCA's likely approach to financial crime issues relating to consumer credit businesses and, in particular, its responsibilities under the MLRs. The FCA will set out detailed proposals on guidance to consumer credit firms on financial crime issues "in due course".

Fees

Chapter 13 of CP13/7 sets out the FSA's proposals for how the FCA's consumer credit regime will be funded. This includes fees for interim permissions, fees for authorisations and annual fees, as well as the FOS general levy.

Next steps

The government consultation and CP13/7 set out the following timetable for the reforms:

17 April 2013	Deadline for responses to the specific question in the government consultation on the impact assessment.
1 May 2013	Deadline for responses to the HM Treasury/BIS consultation and to CP13/7.
Before summer 2013	Government to lay secondary legislation before Parliament.
Summer/autumn 2013	FCA feedback on CP13/7.
Autumn/winter 2013	FCA to issue a second consultation with detailed rules for the new regime.
Autumn/winter 2013	FCA to start to consider notifications from CCA licences firms for interim permissions.
March 2014	FCA policy statement to the second consultation paper.
1 April 2014	Transfer of consumer credit regulation to the FCA.
Between 1 April 2014 and 1 April 2016	FCA to operate am interim regime for the regulation of consumer credit.
Autumn/winter 2014	FCA to start to consider applications from firms with interim permissions
Spring/summer 2016	Authorisation process completed.
2019	Deadline for the FCA to review retained CCA conduct requirements and to develop rule-based alternatives where possible.

For more information on the transfer of consumer credit regulation to the FCA, see Practice note, Government plans to transfer consumer credit responsibility from OFT to FCA.

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Government and FSA consult on transferring consumer credit regulation to the FCA | Practical Law