On 1 April 2014, responsibility for the regulation of consumer credit activities transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA). The Financial Services and Markets Act 2000 (FSMA) replaces the provisions of the Consumer Credit Act 1974 (CCA 1974) that cover licensing and other aspects of the regulatory framework for consumer credit regulation. Therefore, consumer credit activities that were licensable under the CCA 1974 have become regulated activities under FSMA.
SRA-authorised firms, up until 1 April 2014, carried on consumer credit activities under an OFT group consumer credit licence which was held by the Law Society (managed by the SRA).
SRA-authorised firms could undertake consumer credit activities set out in the group licence. These activities included consumer credit, credit brokerage, debt adjusting and debt counselling, debt collecting, debt administration and provision of credit information services.
The group licensing system therefore, enabled firms to operate without having an individual licence, provided that they were overseen by their professional body.
HM Treasury and the FCA confirmed that there would be no equivalent group authorisation to OFT's group licensing regime. From 1 April 2014 onwards, firms carrying on regulated consumer credit activities must:
- be authorised by the FCA with the appropriate permission;
- have been granted interim permission by the FCA;
- be exempt under the SRA's arrangements made under Part 20 of FSMA; or
- cease to carry on consumer credit activities.
SRA-authorised firms should have considered if and/or how the removal of the group licence regime has affected them. In particular, firms will need to consider whether they meet the criteria set out in Part 20 of FSMA (see sections 327 and 332(4)).
Firms may already be familiar with the Part 20 regime in relation to regulated financial services but it is now also relevant to consumer credit activities.
Under Part 20 of FSMA, the carrying on of FSMA regulated activities by members of a Designated Professional Body (DPB), such as the SRA (by virtue of being the independent regulatory arm of the Law Society), is exempt from the general prohibition and SRA authorised firms carrying on regulated activities under the Part 20 regime do not have to be authorised by the FCA. These firms are referred to as exempt professional firms (EPFs).
Part 20 has two key provisions relevant to SRA-authorised firms: FSMA regulated activities may be carried on by a member of a DPB who is not authorised by the FCA where the regulated activity "...arises out of, or is complementary to, the provision of a particular professional service to a particular client... " (s332(4) of FSMA) and the regulated activity "...must be incidental to the provision by him of professional services..." (s327(4) of FSMA).
As a DPB, the SRA is required to have rules that govern the carrying on of exempt regulated activities; these are the SRA Financial Services (Scope) Rules 2001 (Scope Rules) and the SRA Financial Services (Conduct of Business) Rules 2001 (COB Rules).
If firms can demonstrate that they fall within Part 20 in relation to consumer credit activities, then they must comply with the Scope and COB Rules.
Transitional arrangements were put in place for the period 1 April 2014 to 31 March 2016 and changes to the Scope Rules and the SRA Handbook Glossary 2012 were made in order to facilitate the transfer of regulation of consumer credit activities to the FCA. These arrangements were approved by the FCA and the Legal Services Board (LSB). The transitional period was originally due to end on 30 September 2014.
Rule 5.11 has been inserted into the Scope Rules which requires firms that carry on a "credit-related regulated activity" or a connected activity to comply with the relevant provisions and guidance set out in the FCA's Consumer Credit sourcebook (CONC) as they were in force immediately before 1 April 2014.
The "credit-related regulated activities" are set out in out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
These arrangements apply to SRA-authorised firms that fall within the Part 20 exemption and continue to carry on credit activities as EPFs.
During the transitional period, firms carrying on credit-related regulated activities will be required to comply with the guidance and other provisions listed in the transitional provisions in the FCA's CONC. These provisions should not impose any new obligations as firms should already be complying with them but firms will need to adopt a common sense approach in interpreting them, for example, references to the OFT in these provisions and guidance should be read as if they referred to the FCA and references to the relevant supervisory authority to mean the SRA.
In October 2014 we consulted on whether to withdraw from the Part 20 regime in respect of consumer credit activities. Following that consultation, the SRA Board decided that there was benefit in us remaining within the regime and we have engaged with the FCA in developing proposals for proportionate regulatory arrangements for us to do so.
Our discussions with the FCA resulted in proposals set out in a consultation paper which was issued on 26 June 2015 and closed on 7 August 2015. The consultation paper set out our approach to regulating consumer credit activities, and draft rules to put this into effect.
HM Treasury changes to consumer credit activities
Contentious business and consumer credit
The SRA's consultation paper on consumer credit in 2014 stated that we were making representations to HM Treasury and the FCA about the need to extend some of the existing "contentious business" exclusions in the Financial Services and Markets Act 2000 (Regulated Activities) Order (RAO). These exclusions appeared, on the face of it, to be available only where proceedings had been issued and did not cover pre-issue work. We suggested widening the exclusions to exclude some consumer credit activities that are carried on by SRA-regulated firms during pre-issue work and for the exclusions to be available to firms irrespective of whether proceedings were commenced.
We worked closely with HM Treasury and the FCA in this matter and this resulted in the Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2015 (SI 2015/853) which came into force on 24 March 2015. This Order does exactly what we were hoping for and we believe that it will be of great benefit to firms without any reduction in consumer protection as these activities will still be regulated by the SRA.
What do these changes mean?
These changes mean that certain consumer credit activities, such as debt collecting, will be excluded from regulation under FSMA where those activities are undertaken by solicitors (or other persons authorised under the Legal Services Act 2007) in the course of providing advocacy services or litigation services. The definition of these services is wider than the previous definition of "contentious business" and therefore would include pre-issue work. This will be particularly beneficial to firms that were concerned that they may not be able to rely on the Part 20 exemption in relation to such pre-issue work. Where an activity is excluded under the RAO then it is not regulated under FSMA. Consequently, such firms will not need to be authorised by the FCA or even rely on the Part 20 exemption in order to undertake these excluded activities. This is because Part 20 is not relevant unless the activities in question are regulated activities under the RAO.
Payment by instalments
HM Treasury considered amending the exemption in article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) by increasing the number of instalments over which repayments could be made under the exemption. This amendment was made by the Financial Services and Markets Act 2000 (Miscellaneous Provisions) (No 2) Order 2015 (SI 2015/352).
With effect from 18 March 2015, the number of instalments that fall within the exemption increased from four to twelve.
The above exemption will not however, be available if the agreement to accept payment by instalments is entered into after the debt has been incurred. This is because the exemption only applies to borrower-lender-supplier agreements (these relate to financing of a transaction) and not to the re-financing of an existing debt.