The regulatory regime for consumer credit work changed on 1 April 2014. On this date responsibility for the regulation of consumer credit work transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA).
The main piece of legislation for the regulation of consumer credit work remains the Consumer Credit Act 1974. The 1974 Act covers licensing and other aspects of the regulatory framework for consumer credit work. The OFT under the 1974 Act issued group consumer credit licences to various professional bodies including the Law Society of Scotland. The Society held such a licence for all individual practices but that licence ceased to have effect after 31 March 2014.
The Society introduced an interim rule on consumer credit work as part of the IFB regime on 1 April 2014. This interim rule became permanent with effect from 1 April 2015.
The Society’s specific consumer credit rule in the IFB Rules provides (at 2.20.7):-
“Where a licensed person [that is a licensed practice unit] carries out a consumer credit activity it must comply with any relevant FCA conduct of business rules [related] to that activity as if it were authorised by the FCA”.
The purpose of this Guidance is to assist practices regulated for IFB when they conduct consumer credit work under an IFB licence.
2. Two principles of the IFB Regime
There are two fundamental principles of the IFB regime. The first principle is that the regulated activity (that is the IFB work) must be incidental to the provision by a practice of professional services. This principle is set out in Section 327(4) of the Financial Services and Markets Act 2000. The second principle is that any IFB work (and there are up to six categories of IFB work) must arise out of, or be complementary to, the provision of a particular professional service to a particular client. This principle is contained in Section 332(4) of the 2000 Act.
3. UK Legislation on the Regulation of Consumer Credit work
The FCA under the Financial Services & Markets Act 2000 is the regulator of all consumer credit work in the UK. Consumer credit work is now a “collection of regulated activities”. The statutory instrument which defines those activities which are “credit-related regulated activities” is the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 as amended. The principal activities defined as “credit-related regulated activities” are -
(a) Operating an electronic system in relation to lending.
(b) Credit broking.
(c) Debt adjusting and debt counselling.
(d) Debt collecting.
(e) Debt administration.
(f) Provision of credit references and providing credit information.
(g) Entering into a regulated credit agreement as a lender.
(h) Entering into a consumer hire agreement as owner.
4. Exclusions from the Regulation of Consumer Credit Activities
There are a number of exemptions and exclusions for certain types of work set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and its various Amendment Orders. These exclusions and exemptions mean that certain activities are not regulated activities and are therefore not caught by the Financial Services and Markets Act 2000. An important exclusion, in relation to consumer credit work, is contained in the Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2015 (SI 2015/853) which came into force on 24 March 2015.
The provisions within the 2015 Order mean that certain consumer credit work, such as debt collecting, is excluded from regulation under the 2000 Act where those activities are undertaken by a solicitor in the course of providing advocacy services or litigation services. The drafting of this exemption means that it only applies to a solicitor as defined in the Solicitors (Scotland) Act 1980 and not an incorporated practice.
There is another exclusion (in Article 60F of the 2001 Order) which relates to “payment by instalments”. This exemption is only for borrower-lender-supplier agreements for fixed-sum credit under which the credit has to be repaid by not more than 12 instalments within 12 months from the date of the agreement, without interest or charges (and excludes hire-purchase and conditional sale agreements). When this exemption was first introduced the number of instalments that fell within the exemption was four. The Financial Services and Markets Act 2000 (Miscellaneous Provisions) (No 2) Order 2015 (SI 2015/352) increased the number of instalments that fall within the exemption to 12 from 18 March 2015.
It is important to note that this exemption for payment by instalments is not available if the agreement to accept such payment was entered into after the debt had been incurred. This is because the exemption only applies to “borrower– lender–supplier agreements” and not to agreements relating to the re-financing of an existing debt.
5. Key issues to consider in the regulation of Consumer Credit activities
There are a number of key issues which a practice should consider to determine whether it needs (and is eligible for) an IFB licence from the Society for consumer credit work. These issues are:-
• Is your practice conducting any of the categories of “credit-related regulated activities” as set out in Section 3 above?
• Is your practice carrying on such an activity by way of business?
• Does the activity fall within any of the exclusions or exemptions under the new statutory regime for consumer credit activities?
• Are the services being provided in an “incidental manner” and arising out of, or complementary to, the provision of a particular professional service to a particular client?
A practice which is conducting a consumer credit activity (which does not fall under one of the exemptions or exclusions) and which is provided in an incidental manner in connection with a particular professional service requires and may apply for an IFB licence. The alternative options are either not to conduct consumer credit work or seek full authorisation for such work from the FCA.
6. FCA’s Consumer Credit Source Book (CONC)
The FCA has produced its own provisions and guidance on the regulation of consumer credit activities which are set out in its Consumer Credit Sourcebook (CONC) in addition to the requirements set out in the Consumer Credit Act. A practice, when it conducts consumer credit work under an IFB licence, must comply with any relevant FCA conduct of business rules related to the consumer credit activity. The FCA Consumer Credit Sourcebook can be accessed via the FCA’s website.
The rest of this Guidance sets out some, but not all, of the main provisions of that FCA Sourcebook in summary form.
(a) The FCA principles for business (while not part of CONC should be followed)
The FCA has eleven principles, all of which apply to the conduct of consumer credit work, although eight of those are of particular relevance. Those eight principles are:-
• Principle 1 – a practice must conduct its business with integrity.
• Principle 2 – a practice must conduct its business with due skill, care and diligence.
• Principle 3 – a practice must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
• Principle 6 – a practice must pay due regard to the interests of its clients and treat them fairly.
• Principle 7 – a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
• Principle 9 – a practice must take reasonable care to ensure the suitability of its advice and discretionary decisions for any client who is entitled to rely upon its judgment.
• Principle 10 – a practice must arrange adequate protections for clients’ assets when it is responsible for them.
• Principle 11 – a practice must deal with its regulator in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the practice of which that regulator would reasonably expect notice.
(b) Guidance on Financial Difficulties
The FCA’s guidance on financial difficulties identifies a range of factors of which a practice should reasonably be aware and which may indicate that a client is in financial difficulties. For example, whether a client has been unable to pay the minimum repayments in relation to a credit card for months consecutively is one such factor.
(c) Principal sections within the FCA Consumer Credit Sourcebook (CONC)
The FCA Consumer Credit Sourcebook is divided into 15 principal sections:-
• CONC1 – deals with the application and general purpose of the Sourcebook on Consumer Credit and guidance on financial difficulties.
• CONC2 – this deals with the general principles which will apply to a practice with respect to “credit-related regulated activities”. This part also deals with specific rules for lenders/borrowers, credit brokers, debt counselling, debt adjusting and credit information services.
• CONC3 – this section deals with financial promotions and communications with clients on consumer credit work.
• CONC4 – this section deals with pre-contractual requirements and applies to lenders/owners, credit brokers and P2P platforms.
• CONC5 – this section is entitled “Responsible Lending” and is relevant for any practice which provides lending to clients.
• CONC6 – this section deals with post contractual requirements.
• CONC7 – this section deals with arrears, default and recovery and applies to lenders/owners, P2P platforms and debt collectors.
• CONC8 – this section deals with debt advice and applies to debt counselling, debt adjusting and credit information services.
• CONC10 – this section deals with the specific rules for debt management firms.
• CONC11 – this section deals with cancellation rights under consumer credit agreements.
• CONC12 – this section sets the requirements for those practices which were granted interim permission from the FCA for credit-related regulated activities.
• CONC13 – this section deals with the guidance on the duty to give certain information under Sections 77, 78 and 79 of the Consumer Credit Act 1974.
• CONC14 – this section deals with requirements in relation to agents.
• CONC15 – this section deals with second charge lending.
Please do contact the Registrar, David Cullen on firstname.lastname@example.org or 0131 476 8160 if you would like further guidance in relation to consumer credit work under the Society’s IFB regime.