Michael Nutman examines the requirements legal service providers have under the Financial Conduct Authority regime – and provides a stark warning should the Solicitors Regulation Authority withdraw its status as a ‘designated professional body’
In the run up to the Financial Conduct Authority’s (FCA) first anniversary two important questions need addressing. First, do legal service providers need FCA authorisation when offering regulated consumer credit services like debt adjustment, debt counselling and debt collecting? Secondly, if FCA authorisation is required, what happens where a legal service provider fails to obtain it?
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Even if your own FCA authorisation is in place, or is progressing by virtue of an FCA interim permission, you should still take an active interest in the authorisations of your legal service provider. If your legal service provider gets these wrong, you and your consumer credit or consumer hire agreements, could be exposed.
Do legal service providers need FCA authorisation?
Prior to 1 April 2014 legal service providers benefited from the Law Society’s group consumer credit licence and undertook the regulated consumer credit activities of debt adjusting, debt counselling and debt collecting without the need for direct regulation by (what was) the Office of Fair Trading (OFT). The Solicitors Regulation Authority (SRA) managed the group licence and monitored those firms that took part in consumer credit related work. While legal service providers appreciated this ‘hands off’ approach the Government wanted to achieve consistency across all sectors – ‘achieving consistency’ being the byword for ‘further change is needed’.
On 1 April 2014 the newly created FCA confirmed that there would be no equivalent group authorisation to the OFT’s group licensing regime. As a result, and taking effect from 1 April 2015, legal service providers carrying on regulated consumer credit activities must be authorised by the FCA, have been granted an FCA interim permission, have accurately identified an exemption which they can rely upon, or have ceased carrying out consumer credit related work altogether.
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By GlobalDataBy way of example Shoosmiths LLP obtained its FCA interim permission for the appropriate consumer credit activities in advance of 1 April 2014 and anticipates achieving full authorisation in June 2015. As Shoosmiths LLP is expanding its financial services offering and is a leader in the motor finance sector it was felt that a belt and braces approach needed to be taken. Simple. It is where legal service providers seek to avoid FCA authorisation that complications may arise.
The primary exemption that legal service providers can seek to rely upon is Part 20 of the Financial Services and Markets Act 2000. This allows a legal service provider to register with the FCA as an exempt professional firm (EPF) which can then conduct consumer credit work under the control of the SRA (a ‘designated professional body’). The following criteria must be met first:
(a) The legal service provider must account to its client for any commission or other advantage it receives as a result of the consumer credit activity;
(b)The consumer credit activity in question must arise out of or be complementary to the provision of a particular professional service to a particular client; and
(c)The manner of the provision of any service in the course of carrying on the consumer credit activity must be incidental to the provision of professional services generally.
Unfortunately there still remains very little guidance (from the FCA or otherwise) on what it means for consumer credit work to be ‘incidental’ to a legal service provider’s professional services generally or to be ‘complementary’ to a legal service provider’s specific client work. As a result it remains extremely difficult for a legal service provider to know if the exemption is available to them. Mistakes are going to be made.
What is clear is that it is now no longer possible for a legal service provider to carry out consumer credit related activities like debt collection or debt counselling in isolation for a client. Were this to happen a legal service provider would be failing to make its consumer credit related work ‘complementary’ to the other services that it provides and so the Part 20 exemption would be unavailable.
It is also clear that where consumer credit related work forms the primary source of income for a legal service provider – perhaps where debt collection is a speciality of the firm – it will be extremely difficult to argue that the consumer credit related work is ‘incidental’ to a firm’s professional services generally. Uncertainty prevails as to the threshold for an ‘incidental’ level of income, but it is likely to be very low indeed – and very difficult to satisfy as a result.
What happens if a legal service provider gets its assessment wrong?
If a legal service provider makes an assessment incorrectly it could be seen to have engaged in regulated consumer credit activity without authorisation, even if it thought it qualified as an EPF. Not only is this a criminal offence but it could also mean that the agreements to which the consumer credit activity related are unenforceable. As a recipient of consumer credit related legal services, you must bear this in mind.
It should also be noted that the SRA has been consulting on withdrawing from the FCA’s ‘designated professional body’ regime altogether for consumer credit related activities. If the SRA decides to take this route the Part 20 exemption would fall away entirely. As a result, all legal service providers engaged in consumer credit activity would, from 1 April 2015, need to have FCA authorisation, an existing FCA interim permission or have ceased consumer credit related work altogether.
As the seismic changes to the consumer credit world continue, care should be taken to ensure that your legal service provider is up to speed and has made the right assessment of its FCA authorisation needs.
Michael Nutman is a commercial paralegal at Shoosmiths
