O, Brave New World: a beginner's guide to FCA regulation
As I’m sure you will have heard, from April of this year, the Financial Conduct Authority (FCA) will take over the regulation of consumer credit from the Office of Fair Trading (OFT). I understand that there’s a fair amount of confusion about who will be affected by the new rules, as I’ve seen a lot speculative reports on which activities will fall under the FCA’s regulatory regime. Just for clarification, if you conduct any of the followings types of business, categorised by risk, you will be regulated by the FCA after April:
Lower Risk Activities:
- Consumer credit lending (where the main business is selling goods and non-financial services, and there is no interest on the charges – this excludes hire purchase and conditional sale)
- Consumer hire
- Secondary credit broking (where the main business is selling goods or nonfinancial services and broking is a secondary activity)
- Not-for-profit debt counselling and debt adjusting
- Not-for-profit credit information services
Higher Risk Activities:
- Consumer credit lending (this includes personal loans, credit card lending, overdrafts, pawn broking, hire-purchase, conditional sale etc.)
- Credit broking
- Debt adjusting
- Debt counselling
- Debt collection
- Debt administration
- Credit information services
- Credit reference agency
- Peer-to-peer lending
As you might expect, the headline spotlight has mainly focussed upon high-cost, short-term lending companies, however, this regulation will cover even those firms who do something as seemingly straightforward as an interest-free payment plan for clients.
As a compliance and business consultancy firm, SimplyBiz has experienced its fair share of changes in both regulator and regulation. In fact, the Financial Conduct Authority is also reasonably new to us in the financial services sector, having taken over from its predecessor the Financial Services Authority (FSA) in April 2013. Although the transition between the FSA and the FCA was, on the surface, a less dramatic change than the upcoming move from the OFT to the FCA, it was not without its challenges; and was by no means the first change of its kind in recent years. Up until the late 1980s we had a plethora of regulatory bodies, with a huge range of acronymised titles, each covering a separate area of financial services. The creation of one regulatory body greatly simplified many processes, and improved clarity for consumers, but there’s no doubt that the specifics of regulation are constantly changing and keeping up with them can be a Sisyphean task. After all, UK financial services is generally considered to be one of the most heavily regulated sectors in the world!
So, why the change from OFT to FCA? As you would expect, the Government’s main objective is to “strengthen consumer protection”. However, it does offer some reassurance with the caveat that it will only place requirements on firms where there is a clear benefit for consumers – in other words, not introducing regulation purely for the sake of it. As you can see from the risk categories assigned in the above list of activities, the FCA are approaching this transition period with a clearly defined sense of proportionality.
The ways in which the new regime aims to strengthen consumer protection are as follows:
- Increased flexibility through rule-making powers;
- The FCA will have more resource available to them that the OFT, and therefore should be able to react more effectively;
- The FCA will aim to deal with problems earlier;
- They also aim to improve standards throughout the industry, by increasing scrutiny on firms during their application process and tackling non-compliant activities or firms at an earlier point; and
- Improving access to redress.
There will be highly detailed standards and rulings which will apply to various areas of consumer credit (peer to peer lending, debt management, firms who hold assets on behalf of clients etc.), however, some of the FCA’s conduct standards will apply to all;
- Principles for business which will establish the principles for behaviour which are required from firms in relation to their consumer credit activities.
- High level standards which will govern with whom firms should organise and manage their affairs, including arrangements for senior management and systems and controls.
- Conduct standards which will set out detailed guidance on how firms should conduct themselves with customers during the sales process.
If you are going to be one of the firms moving from OFT to FCA regulation, the major changes you are going to experience will be in the level of supervision you receive and the reports you will be required to complete.
The level of supervision to which firms will be subject will be decided based on the potential impact it is judged that their activities could have on the Government’s objective to strengthen consumer protection. All consumer credit firms will be categorised as either ‘fixed’ or ‘flexible’ portfolio. We expect the vast majority of consumer credit firms will fall into the ‘flexible portfolio’ category, who will supervised by a team of sector specialists.
Although the tasks ahead might seem daunting and onerous, there will also be benefits to this increased level of regulation. I’m sure we would all agree that any potential advancement in consumer protection is a good thing and this move will also undoubtedly see a positive change to the general perceptions of the consumer credit market as a whole.
In future articles, we will be looking more closely at the FCA authorisation process, its approach to supervision and enforcement and the changes you will need to make to any promotional or marketing material going forward in order to comply with FCA regulation. In the meantime, if you need further details on anything mentioned in this piece, we suggest you visit the Consumer Credit Centre (www.consumercreditcentre.co.uk) for up to date and relevant information.