OFT with Bigger Teeth


Why the change?
It’s been a while coming but mounting evidence from the Citizens Advice service has shown questionable practices from consumer credit firms continue to have a detrimental impact on consumers, affecting not only their financial situation, but also their mental and physical health and family life. As consumer credit has grown significantly in the wake of the financial crisis, so ever more consumers have found themselves with no means of getting themselves out of the spiral of debt they find themselves in.

Gross consumer credit lending for 2013 was £201.182bn according to the Bank of England.  Outstanding unsecured consumer credit lending stood at £158.9 bn at the end of November 2013.  As a percentage of GDP UK lending is now higher than any other country in the world, bar Cyprus.

The growth of the UK consumer credit industry has outpaced its current regulation which is now considered no longer fit for purpose and why we find ourselves in the situation we have today, with the FCA taking over responsibility for some 50,000 consumer credit firms.

The OFT put simply had insufficient funding and resources nor the right kinds of powers capable of supervising and monitoring firms’ compliance effectively.  It was unable to proactively mitigate non-compliant behaviour, as it could only act on information it received once non-compliance had already occurred.

All this has created an environment which quite clearly is riddled with consumer detriment, a key protectionist goal of the FCA. The fact is that this could no longer continue unchecked and finally the government stepped in to take some affirmative action.

The government firmly believes that the FCA will be better equipped to tackle the consumer detriment and malpractice that has taken place under the current regime with stronger powers and resources to protect consumers and promote effective competition in the consumer credit market e.g. the ability to close a firm down and order compensation to be paid to people who are affected.  It will be able to respond more quickly and flexibly to market changes, ensuring that regulation can keep pace with this every changing market.  It will ensure irresponsible firms and bad practice will have no place in the consumer credit marketplace.

As the Government said in its consultation on the future regulation of consumer credit:

‘Consumer credit is vital to the UK economy. It funds the purchase of goods and services and provides people with greater flexibility with their spending. A healthy consumer credit market which serves businesses and consumers well is central to economic recovery and growth; and a key element of a healthy consumer credit market is effective regulation.’ The focus now on creating better behaviours in the sector and firms being able to evidence employee competence in terms of delivering products and service is key for both regulator and the industry.

It means all firms carrying out consumer credit activities will have to abide by the same set of standards as the rest of the financial services industry, following the rules in the FCA Handbook

What does it mean?
While a lot of focus has been on payday lending, it is important to remember this not only affects financial services providers, but all companies that provide credit facilities ranging from retail store cards to second hand car dealerships.

The FCA’s operational objectives are to protect consumers, protect and enhance the integrity of the UK financial system and promote competition in the interests of consumers.

It means all firms carrying out consumer credit activities will have to abide by the same set of standards as the rest of the financial services industry, following the rules in the FCA Handbook.  The new Consumer Credit Sourcebook, a combination of the old Consumer Credit Act and OFT regulations as well as some new rules, have been incorporated into the Handbook.

By now, ‘hopefully’, those firms or sole traders with previously up to date OFT licences and wishing to continue trading, will have registered with the FCA for ‘interim permission’.  This interim permission will be valid until the FCA require an application for full authorisation or arrangements are made to become an appointed representative of an authorised firm.

These things are merely the fundamentals though. What firms may not have given a great deal of consideration to is what does all this mean for day to day working practices? Are our people properly trained? Do we have robust systems and controls in place? What do our record keeping systems look like and crucially if asked to could we provide the kind of evidence the regulator may ask for in terms of our risk and performance profile?

Under the old regime, the OFT monitored a licence holder’s fitness to hold the licence, which included taking account of the conduct of the firm’s employees, agents and controllers.  Under the new regime, the FCA will apply the ‘approved persons’ regime.  Therefore, the FCA will require individuals in consumer credit firms who will be carrying out controlled functions to be approved by the FCA, before they do so.  This means that approved persons, Board Members & Directors, will be personally liable for the actions of an FCA-authorised firm therefore should be fully briefed on the changes to regulation and the impact of this on the business.  The FCA’s powers include the ability to fine an approved person or to ban them from working within the financial services industry for any length of time.

In many cases, Board members will become approved persons for the first time, therefore it is vital they fully understand their obligations.  It’s not just senior management and members of the Board that require training around the new legislation, not to mention perhaps a refresher on existing rules being carried forward.  It’s essential all members of the firm know what the implications of the new legislation are, from the Compliance team right through to marketing and back office staff.  If everyone is not on the same page as to what is expected and the changes that need to take place it is only a matter of time before something slips.

So, as we have already mentioned staff training and keeping everyone up to speed on the changes to regulation on an ongoing basis is crucial to mitigating risk.  This then calls out for an intelligent approach to effective staff training and putting sufficient safeguards in place to be able to mitigate and identify where the knowledge gaps are, as well as ensuring everyone is adopting the correct attitudes and behaviours whilst all delivering the same message, customer facing or not.  We’ve all seen from the FCA’s Three Pillar approach and recent focuses on culture and aligning it with customer outcomes that ensuring the customer is not placed at risk is at the heart of everything they do. It will be interesting to see what modifications and measures firms put in place to satisfy this somewhat elusive and indefinable expectation.

I’m sure, if it’s not already the case, most firms will be incorporating compliance/risk as a standard item on the Board agenda.   The FCA has said its approach will be a proportionate one, concentrating its focus on firms that they believe pose the highest risks and potential customer detriment.  So it may be a relief to some that the types of systems and controls they must have in place reflect the nature, scale and complexity of their business, as well as the risk the activity might pose to consumers.  However, even for small businesses the new regime presents significant challenges, as the FCA has already indicated it will be more demanding and more expensive.

To most firms the new regime involves a considerable increase in cost to ensure adequate systems, controls, processes and resources are in place to demonstrate to the regulator they are suitably equipped to safely carry out their respective activities.

One area may that may sound fairly straightforward but will inevitably manifest into a large headache for those firms whom do not take necessary action will be ‘record keeping’.  If it is not documented it did not happen.  The ability to keep accurate and complete records of all firm activities and having easy access and being able to display it in a comprehensible format will be key. Firms must have proficient methods in reporting on a multitude of recorded data and be able to readily present this to the regulator.  Having that level of openness and transparency will instil confidence with the regulator and encourage a less obtrusive approach.  We’ve been told the new FCA supervision will be more probing, with increased engagement with businesses enabling the FCA to identify shortcomings so that it can make corrective suggestions and recommendations.  The more a firm can display it is adhering to the regulations the better.

The FCA has a daunting task on its hands as does the entire consumer credit industry.  It is crucial, now more than ever, for firms to step back and take a hard look at where their inadequacies lie, because if they don’t the FCA certainly will.  I’m sure we’ll be hearing examples of firms that have not taken heed of the various forewarnings as April and the rest of the year unfolds.  Should be interesting!


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