For the past 40 years the consumer credit industry has been regulated by the Office of Fair Trading (OFT) under powers granted in the Consumer Credit Act 1974 (CCA). On the 1st April this year that responsibility passed over to the Financial Conduct Authority (FCA) along with new powers to deal with a sector that has changed rapidly over recent years.
This changeover requires the FCA to take on the authorisation of 50,000 businesses, many of which have no previous experience of dealing with any regulator other than the OFT. In order to deal with the size of this influx, and the regulatory shock many of the businesses will face, the FCA is phasing in the authorisation process over two years. It has also created a two tier regime so that it can focus its time and resources on the areas of highest risk. As we will see later, this risk based approach will be initially focussed very strongly on the 200 or so payday loan businesses that now come under the FCA’s wing.
The Consumer Credit Act 1974
The world in 1974, into which the CCA was born, was very different to today – think flares, power cuts, three TV channels and Spangles. The consumer credit industry was very different to today’s too. Goods on credit were usually bought on hire purchase, personal loans were much less common and credit cards were a rare and new phenomenon. Indeed it was only two years earlier that the Access card (“your flexible friend”) had been launched into a market previously occupied exclusively by Barclaycard.
In many ways though the CCA was a piece of legislation ahead of its time and set the tone for the later regulatory regime of the FSA/FCA. For example, it included requirements for:
- businesses to be licensed to carry out a range of consumer credit activities from lending to debt advice to operating a credit reference agency.
- lenders to provide borrowers with full information in a specific form.
- the content of adverts to be strictly controlled, including use of the APR to provide consistency
But as the consumer credit market transformed utterly in the intervening years, the CCA failed to keep up. After a slow start (many of the secondary regulations crucial to the Act were not introduced until 1986!) changes generally tinkered at the edges and were slow in coming.
The CCA 2006 did make some significant amendments including a removal of the upper limit for agreements covered under the Act and in 2011 further changes were brought in to comply with the Consumer Credit Directive. Yet on both occasions the government resisted the temptation to pass the responsibility over to the FSA.
The tipping point in the move to FCA regulation of consumer credit was the transition to the twin peaks regime – the government decided it did not want big businesses bearing the cost of dealing with three different regulators so the OFT had to go. Structuring the changeover was problematic though meaning that the changeover could not happen at the time the FCA was launched and, so far, preventing the intention to completely repeal the CCA.
What does the change mean for businesses who were licensed by the OFT?
For most consumer credit businesses the formalities and processes of dealing with a customer will remain almost unchanged. Much of the CCA and the associated regulations remain in place such as the pre-contract information, credit agreement and statement requirements. Where businesses will notice the most difference is in their dealings with the regulator where it will quickly become apparent just how light touch the OFT’s licensing regime was and how limited its enforcement powers.
In order to carry on any regulated credit activity a business will need to be authorised by the FCA. As vetting authorisation applications is going to be such a huge task it was decided to stagger the requirement. All OFT licensed firms were given up to 31st March 2014 to apply for interim permission which will initially allow them to continue to undertake the consumer credit activities on their license.
However, this reprieve is temporary and all firms will need to apply for full authorisation. It is expected that those carrying out the riskiest activities will be required to apply first but all businesses will need to become authorised over the first two years of the new regime.
For many OFT licensed firms, such as a small furniture store that acts as a broker for a lender as a secondary activity, authorisation probably seems like more hassle than its worth. Recognising this, the FCA has provided two alternatives to full authorisation. Firstly, some businesses carrying out specified low risk activities will be able to apply for authorisation on a limited permission basis and then be subject to lower FCA requirements.
There will also be an appointed representative process too. Just as for other areas of financial services, the principal will take full regulatory responsibility for their appointed reps. In order to appoint representatives though a business must be fully authorised – interim or limited permission will not suffice.
Helping newly authorised businesses adapt to the requirements of the FCA regime is likely to be a fruitful area for compliance consultants in the next few months. Amongst other things, businesses will need to adjust to are:
- The consumer credit sourcebook (CONC)
- Systems and controls requirements
- The FCA principles for business
- Approved persons
- Regular reporting
All of these are either new requirements, or a significant step up from what was required under the OFT. As the FCA stated in publishing its consumer credit sourcebook, “Firms … should feel the difference in our regime from day one”.
Payday lenders
The OFT has acted as strongly and as persistently as it can in dealing with these issues but its failure to make the progress to match its rhetoric is indicative of its lack of power as a regulator. With the regulatory changeover that situation is about to swiftly change.
Most firms will have enough on their plate just dealing with the transition to the new regime but some categories of business have more significant changes to adapt to. For example, peer to peer lending businesses are to be brought into the regulatory regime (they were not previously covered by the OFT) and prudential requirements are being phased in for some debt management firms.
The area facing the greatest additional regulatory burden is High Cost, Short Term Credit (HCSTC) – more commonly known as payday lending.
This sector has expanded rapidly and controversially in recent years. Its poor reputation was initially based on the shockingly high interest rates charged (which payday lenders claim is largely due to misrepresentation resulting from applying APR calculations to what are intended to be short term loans). Since mid-2012 the OFT has placed much of its CCA resource into investigations of the payday loan sector and its results have been damning. It has uncovered widespread dubious practices in firms including: lending inappropriately, misrepresentation in adverts and unfair collection practices. The OFT was particularly critical of firms abusing continuous payment authorities (CPAs) to make frequent payment requests of different amounts in an attempt to get hold of any money as soon as it entered a borrower’s account.
The OFT has acted as strongly and as persistently as it can in dealing with these issues but its failure to make the progress to match its rhetoric is indicative of its lack of power as a regulator. With the regulatory changeover that situation is about to swiftly change.
Firstly the FCA is introducing a series of new rules designed to counter some of the poor practice identified. These include:
- Advertisements will need to include a clear warning of the risks involved in taking the loan and information about where to access free debt advice.
- If an individual cannot repay the loan at the end of the term then lenders will often roll it over. While this has some benefits for the borrower it can cause costs to spiral out of control and is highly profitable for lenders. Under the FCA, loans can only be rolled over twice.
- As the OFT identified, some lenders were bombarding borrower’s accounts with CPA requests. The number of times a lender can seek payment under a CPA will be capped at two.
In addition a thematic review on the sector’s collection practices is about to start and the FCA has made be clear in its intention to strongly apply treating customers fairly requirements.
The biggest change however is still to come. The Banking Reform Act 2013 brought in a duty for the FCA to impose a price cap on HCSTC to provide “an appropriate degree of protection for borrowers against excessive charges.” The FCA will consult on issues surrounding this but the cap must be in force by 2nd January 2015.
What’s next?
While 1st April 2014 was a key date in consumer credit regulation it is important to recognise that this is just the start of a process of change rather than a big bang. Over the coming months and years there will be a rolling programme of change and enhancement including:
- The introduction of specific peer to peer lending rules in October 2014
- The introduction of the HCSTC price cap by the start of 2015
- The completion of the transition to full authorisation by April 2016
- A transitional period covering prudential standards for debt management firms ending in 2017
While the logic of bringing the CCA into the FCA’s realm is sound, the extent and difficulty of the changeover for businesses new to the FCA should not be underestimated. The new boss is definitely not the same as the old boss.
