On 1 April, the Financial Conduct Authority (FCA) will take over responsibility for more than 50,000 firms holding consumer credit licences and the OFT will cease to exist. On 28 February, the final version of the FCA's Consumer Credit Sourcebook (CONC) was published, allowing firms limited time to digest this and ensure compliance by the end of a six-month 'grace period'.
As 1 April fast approaches, consumer credit licence-holders will be engaged in reviewing their documents, policies and procedures to ensure that, as of 1 April, they can demonstrate compliance with the Financial Conduct Authorities (FCA) high-level principles and that they will be fully compliant with the FCA's Consumer Credit Sourcebook (CONC) by 1 October. In most cases there will be some trepidation, given the FCA is expected to be a far more proactive regulator of consumer credit than the Office of Fair Trading (OFT).
The FCA has already made it quite clear in its recently published guide for consumer credit firms new to FCA regulation that 'non-compliance is not an option at any time'. Given the many requirements, firms may well be wondering which particular areas they should focus on.
Applying for authorisation
By now, most firms will have applied for interim permission to carry on trading (although the FCA estimates that some 15,000 have still to apply).
Firms can expect to receive a three-month 'application period', the first of which will commence on 1 October. They must apply for full authorisation during that period, or their interim permission will lapse. This means some firms will be required to submit their applications in only six months' time. Those who have still to decide whether they will act as principal to appointed representatives will need to make that decision sooner rather than later, as those intending to act as principal will have the option of requesting an earlier time slot.
Detailed business plans will be an integral part of the application, and firms should therefore be looking now at whether their business plans needs updating, and whether they have the right emphasis given the FCA's focus on consumer outcomes. They also need to consider who their approved persons will be and whether those people will require training, or at the very least an up-to-date explanatory booklet or manual to ensure they fully understand the implications of the role.
Fortunately, the changes required at the current time are not extensive, although it is important that they are made to take effect from 1 April (or, where available, that transitional arrangements are implemented) to ensure documents are at all times compliant. Status disclosures in agreements, some pre-contract information, other documents and letterheads will need updating and there are changes to the declarations used for high net worth and business use exemptions. There are also new information sheets for customers in arrears or default.
The FCA's Principle 6
Principle 6, 'treating customers fairly' (TCF), will apply to consumer credit activities from 1 April. There will be no 'grace period' and the FCA has confirmed this will be its immediate focus. As a priority, firms therefore need to review the policies they have in place for dealing with customers and ensure they are consistent with the principles enshrined in TCF. This will include ensuring that products are appropriately targeted, that customers are provided with clear information and advice in 'plain English', and that customers are treated on a case by case basis taking into account their own personal circumstances (for example, any financial hardship or mental health issues).
It is expected that there will need to be a significant culture change within many firms to ensure the interests of customers really are at the heart of their business and decision-making, and demonstrably so. This will extend to looking at, for example, staff incentive schemes, which are very much a focal point for the FCA currently, to ensure these focus on putting customers first rather than achieving sales.
Compliance with CONC
Most of the detailed obligations set out in CONC replicate existing Consumer Credit Act provisions and OFT guidance, although they will sit within the very different environment of the FCA Handbook and will be subject to the FCA's wide powers of enforcement.
Under CONC 1.2.2R, a firm must ensure its agents and employees are compliant with CONC, and must also take 'reasonable steps' to ensure all other third parties acting on its behalf comply. It is expected that 'on its behalf' will be interpreted quite widely, and there will therefore be a significant burden on firms in terms of oversight and monitoring. Firms should therefore be reviewing and updating their contractual arrangements with third parties to ensure they include adequate provisions relating to responsibility for regulatory compliance.
Turning to the detailed obligations set out in CONC, one of the main concerns when CONC was published in draft last October was that many provisions which currently have the status of OFT guidance were being upgraded to FCA rules. Other parts of the draft sourcebook purported to replicate but in fact went further than existing Consumer Credit Act provisions. This was taken on board by the FCA during the consultation process, and some of the draft rules have now been downgraded to guidance. For example, CONC 4 originally suggested that firms should provide pre-contractual explanations in circumstances going beyond the application of s 55A of the Consumer Credit Act. This has now been amended so firms need only consider whether this would be appropriate.
However, the FCA has refused to downgrade other rules derived from OFT guidance. These are areas firms need to be aware of, given the change in emphasis which means, in effect, that any previous discretion has been removed.
For example, under CONC 5 on responsible lending, firms will have to consider sufficient information to assess sustainability of payments as part of the creditworthiness assessment they carry out before entering into regulated agreements. This has been carried over from the OFT's Irresponsible Lending Guidance, but from 1 April will be a rule. The extent and scope of the assessment should be proportionate to factors which may include one or more of those listed at 5.2.3G, including the amount, type and cost of the credit and the customer's existing and future financial commitments.
Firms will therefore need to review the adequacy of their underwriting systems and lending criteria as to the extent and source of the information they base their assessments on, what the assessments consist of and how they are documented. Even so, deciding on an approach which is likely to satisfy the FCA in terms of proportionality will be difficult, and this seems to be an area which is ripe for future litigation.
Treatment of customers in default and arrears
Under CONC 7, the OFT's Debt Collection Guidance relating to treating customers in arrears with forbearance and due consideration has again been upgraded to a rule. According to the supporting guidance, this could include suspending interest and charges, accepting token payments and allowing 'breathing space' where a customer is developing a repayment plan.
7.3.3G specifies that a firm should allow for arrears to be repaid within the original term of the agreement in order to comply with TCF, unless it reasonably believes terminating the agreement will mitigate adverse consequences for the customer. It remains to be seen how this will work in practice, particularly in relation to hire purchase agreements where there is often a commercial need to recover a rapidly depreciating asset. Firms may require customers to pay higher interest rates and deposits to counter-balance losses they will incur as a result of tighter restrictions on when vehicles can be repossessed.
CONC 7 also requires firms to implement clear, effective and appropriate policies for the fair and appropriate treatment of customers they understand to be 'particularly vulnerable'. The FCA has refused to exclude such requirements until 'vulnerable' has been defined, and in fact does not intend to provide a definition, although an Occasional Paper on vulnerability will be published in 2015 and will include examples of good practice with a view to ensuring a consistent approach across the sector. In the meantime, it will again be difficult for firms to assess whether their policies are likely to satisfy the FCA.
Another area where there will be significant changes is consumer credit advertising, which has been brought within the FCA's financial promotions regime. The Consumer Credit Advertisements Regulations have been carried across to CONC 3 and, as such, there are familiar themes such as requirements relating to the inclusion of representative examples and APRs.
However, the FCA's regime will have broader application, in that a financial promotion is an 'invitation or inducement to engage', however communicated, which is a wider definition than the Consumer Credit Act definition of 'advertisement'.
Firms must also bear in mind the overriding requirement to be 'clear, fair and not misleading', which is not in itself new; however, CONC 3 gives guidance (at 3.3.5G) on what this actually means, which goes beyond existing requirements to use plain and intelligible language and to be easily legible. For example, firms should ensure that, every time the benefits of a product are communicated, there should be a fair indication of relevant risks to give a 'balanced view'. This could be difficult to achieve, at least until firms have a clearer idea of the FCA's expectations.
What should consumer credit firms be doing to ensure they stay compliant?
- Reviewing whether products are appropriately designed for their target market;
- Reviewing policies to ensure they are clear, effective and compliant with the relevant provisions of CONC and the FCA's high-level principles;
- Making sure their people are aware of and appropriately trained on those policies, and more generally to maintain a customer-centric culture;
- Reviewing their arrangements with agents and other third parties.