Jonathan Hall considers the future of consumer credit regulation.
The Financial Services Bill presently going through Parliament is designed to transfer the responsibility for consumer credit regulation from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) which will replace the Financial Services Authority (FSA). The Government proposes to introduce the Financial Services and Markets Act (FSMA) to make this all possible.
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It is the Government’s view that the present system for consumer credit regulation is too complex and imposes too much of a regulatory burden on both businesses and consumers. The Government calculates that it comes at a cost of approximately £235 million a year.
Currently, the OFT share responsibility to enforce the Consumer Credit Act (CCA) with Trading Standards, the Treasury and other bodies. However, it is the firm belief of the Government that this presents a fundamental weakness whereby no one organisation has clear accountability. They believe that the FCA will resolve this.
Despite the assurances from the Government, lenders who are members of the Finance Leasing Association (FLA) have expressed their concerns about the content of the new regime.
One of the major concerns is the area of credit brokers and intermediaries. At present, lenders must take appropriate steps to ensure that intermediaries are not acting unlawfully or involved in unfair business practices. This has worked well but only because these intermediaries have some degree of direct responsibility for their conduct, due in no small part to the responsibilities they have as holders of a consumer credit licence.
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By GlobalDataIn the new regime, however, the proposal is for lenders to be ultimately responsible for compliance on the part of the intermediaries. Lenders recognise this and worry that it would be almost impossible to make firm guarantees for the conduct of their agents and associates.
Of course, it goes without saying, but aside from the logistics of making it work, the cost of making sure that intermediaries comply will be significant.
At the same time, in the new regime there is the proposal to bring to an end all existing consumer credit licences. Lenders who intend to continue to do work in the credit market will first of all need authorisation and will need to make an application for a new licence. The FLA has addressed the Government with those concerns. The FLA is campaigning to ensure that the new and current regime should be kept as close as possible in order to minimise the risk of disruption to the lenders market.
With reference to the proposal to re-apply for licences, the FLA put pressure on the Government to have a rethink and push forward the resolution that existing licensees should be able to continue to do business without going through the red tape of having to apply for authorisation. Most recently, in a positive step, the Government agreed that existing licensees will simply need to register with the FCA without any substantial new regulatory hurdles.
The issue of the relationship between lender, broker and intermediaries will be subject to a review by the Government’s Regulatory Policy Committee. The FLA has already proposed various solutions to this anticipated problem, and one key recommendation is that intermediaries should have the option to be directly authorised by the FCA and therefore recognise shared responsibility to ensure compliance.
Assuming the new system does goes ahead, it will take several years to implement – the current licensed population of lenders is estimated to be 96,000. There will be the need to transfer responsibility for consumer credit regulation to the FCA and it will be interesting to see how the Government intends to deal with existing finance agreements.
If the Government retains the CCA for existing agreements there is the concern that the system as a whole will be inefficient. As such, there is a proposal to transfer all existing agreements to the FCA to ensure consistency. Whatever happens, there will also need to be specific redress for those agreements that are already the subject of legal action as well as measures put in place to deal with the right to withdraw under the provision of the Consumer Credit Directive.
Looking at the proposed timetable devised by the Government, they are set to consult on draft legislation in January 2013. It is expected that this, in addition to a Regulatory Activities Order, will finally spell out which parts of the CCA will be included/retained.
Moving forward further still, in September 2013 there will be a consultation on the draft rules for regulating consumer credit and a final Government decision on whether to apply a new regime to consumer credit will be taken thereafter. New rules of conduct (‘the rulebook’) are expected to be published in April 2014 and it is these rules that are expected to replicate current CCA provisions and OFT guidance.
In anticipation of the mammoth task of updating and changing IT systems and other processes by lenders, the FLA are making strong recommendations for a practicable and reasonable lead time to introduce the changes. It is clear that there will be further significant developments on the future of the consumer credit regulation in the coming months with a view to the full regime being rolled out in 2016.
Jonathan Hall is an associate solicitor at Chafes Solicitors
