The material below does not form part of the SRA Handbook.
3 October 2013
Changes to consumer credit regulation
On 1 April 2014 the Financial Conduct Authority (FCA) will take over the regulation of consumer credit activity from the Office of Fair Trading (OFT). The OFT will cease to exist on the same date. This will change the way consumer credit activities carried out by solicitors’ firms and alternative business structures are regulated.
The FCA has a published information on its website and committed to publishing a detailed consultation setting out its rules and guidance for regulating consumer credit activities at the end of September. We will keep this section of our website up to date with links to the FCA website and any further information we obtain.
Q1. What is happening to the group licence issued by the OFT?
A. The group licence issued by the OFT will cease to have effect from 1 April 2014. The FCA will not be continuing the group licence regime, instead firms wishing to continue to carry on consumer credit activities for their clients will need to be authorised by the FCA (the full authorisation process can take up to 6 months to complete). Carrying out consumer credit activities without this permission after 31 March 2014 will be a criminal offence and a breach of FCA regulations.
For firms with their own OFT consumer credit licence the FCA has put in place an interim permission process. The FCA launched this application process on 1 September. Forms and guidance on how to apply can be found on the FCA website: Information on registering for interim permission - Financial Conduct Authority. Only firms with a current OFT consumer credit licence will be eligible to apply for the interim permission.
Q2. How will consumer credit activity regulated by the FCA impact on SRA regulated firms?
From 1 April 2014 consumer credit activity will be a mainstream financial services activity. An SRA regulated firm will only be able to carry out consumer credit activities including credit brokerage, debt collecting, debt advice, and debt management or administration etc if:
The firm is authorised by the FCA to carry out this business by either full FCA authorisation or having been granted interim permission to continue to operate;
The firm is acting in the course of contentious business which arises from a consumer credit or hire agreement; or
The consumer credit activity is an exempt regulated activity under Part XX of the Financial Services and Markets Act 2000 (FSMA).
Part XX of FSMA sets out a number of conditions that must be met for a regulated activity to be exempt (see sections 327 and 332(4) of the FSMA). These include the following:
- the activity arises out of, or is complementary to, the provision of a particular professional service to a particular client;
- the manner of the provision by the firm of any service in the course of carrying on the activities is incidental to the provision by the firm of professional services;
- the firm accounts to the client for any pecuniary reward or other advantage which the firm receives from a 3rd party; and
- the firm does not carry on any activities regulated by the FCA other than those permitted under Part XX of the FSMA or in relation to which the firm is an exempt person.
Q3. What do SRA regulated firms need to consider?
SRA regulated firms will need to consider if and/or how the removal of the group licence regime is going to affect them. In particular firms will need to consider whether they wish to apply for an OFT consumer credit licence to enable them to meet the criteria for the interim permission process or whether they will meet the criteria set out in Part XX of the FSMA (see sections 327 and 332(4)). Firms may already be familiar with the Part XX regime in relation to financial services but it will now also be relevant to consumer credit activities.
Firms who believe they will meet the Part XX criteria will still have to comply with the SRA Financial Services (Scope) Rules 2001 and the SRA Financial Services (Conduct of Business) Rules 2001. These form part of the SRA Handbook and will be amended to reflect the changes to consumer credit regulation once the FCA rulebook has been published.
Q4. Do I need to be authorised by the FCA for consumer credit activities?
If you carry on activities which meet the definition of consumer credit activities you will need to either be authorised in full by the FCA or have been granted interim permission by 31 March 2014 unless you can satisfy the criteria in Part XX of FSMA. This criteria includes the requirement that you only carry on these activities when they arise out of, or are complementary to, another professional service to a particular client.
Q5. What do I do if I already hold FCA authorisation for other mainstream financial services regulated activities?
If the firm already holds full FCA authorisation for a non-credit related activity, it will not be able to benefit from the exemption under Part XX of FSMA. This is because the effect of section 327 (7) of FSMA is that an exempt professional firm cannot be an authorised person. Instead the firm will need to vary its permission to include consumer credit activities. This will need to be done before 31 March 2014 if the firm wished to carry on consumer credit activity and can be done via the Interim Permission process.
Q6. What do I do if I am asked to represent a client in a litigation matter which has arisen from a consumer credit or consumer hire agreement?
You will be able to do this without carrying on a consumer credit activity as the secondary legislation that brings consumer credit activities within the FCA regime excludes, from the new regulated activity of debt collecting, solicitors and barristers representing clients in litigation matters that have arisen from consumer credit or hire agreements. This carries over the current exemption in section 146 of the Consumer Credit Act 1974.
Q7. What should I do if a client asks for or requires debt advice as a result of another matter the firm is working on for that client?
This should meet the criteria set out in Part XX of FSMA. The firm must comply with the SRA Financial Services (Scope) Rules 2001 and the SRA Financial Services (Conduct of Business) Rules 2001 but would not require FCA authorisation or permission. It should be noted that in order to meet the criteria in Part XX the firm must make an assessment on a client by client basis. It is not sufficient to assume that all situations will fall within Part XX.
Q8. How do I get authorised by the FCA?
Q9. Will there be a transition period?
There is no transition period. The interim permission regime is designed to allow firms with full OFT Licences a transition period prior to being fully authorised by the FCA. If a firm has not been granted interim permission by 1 April 2014, and its consumer credit activities do not fall within Part XX of FSMA, it must cease all consumer credit activity until it has been approved by the FCA.
Q10. What is the Interim Permission regime?
Full details of how interim permission works can be found on the FCA website. In summary the interim permission is available to firms who have a full OFT Licence. Interim permission is not available to members of organisations who have previously benefited from the group licence regime operated by the OFT. Any member firm who once relied on the group licence and who wishes to offer consumer credit business after 31 March 2014 will need to obtain a full OFT Licence before being eligible for the interim permission. Interim permission will run until April 2016 and is designed to allow firms who have previously been regulated by the OFT to continue trading while transitioning across to the FCA regime. We are advised by the FCA that it is their intention, after 1 April, to begin selecting tranches of firms to take them through the full authorisation process.
Q11. Will there be any new SRA rules?
Yes, in the short term the SRA will make changes to the SRA Financial Services (Scope) Rules 2001 to ensure hey reflect the changes in the regulation of consumer credit. The FCA has granted Designated Professional Bodies (DPBs) a 6 month period in which to make more detailed rule changes once the FCA rules have been published. It is likely detailed SRA rule changes will come into force in October 2014.
Q12. If I become FCA authorised do I need to comply with the FCA Handbook and pay fees to the FCA?
Yes, you will need to comply with the FCA Principles and relevant sourcebooks. If you use the interim permission regime you will pay an initial fee to gain access. Between April 2014 and April 2016 you will be required by the FCA to apply for full authorisation. You will then pay a further application fee and become liable for annual regulatory fees.
Q13. My entire business is based around offering debt recovery services to clients, how will these changes affect me?
Your firm is unlikely to meet the criteria as set out in Part XX of FSMA so you will need to be fully authorised by the FCA. If you currently make use of the group licence and do not have your own OFT licence you will need to consider whether you should apply to OFT for the full licence in order to gain access to the interim permission regime.
Q14. If I do not get an OFT licence in time to apply for the interim permission, can I continue to carry on consumer credit activities for clients?
From 1 April 2014 it will be against the law to carry on consumer credit activities for clients without FCA permission. You will have to cease this work if you do not get an OFT Licence by 31 March unless your activities fall within Part XX of FSMA.