Introducing FCA Regulation
Consumer Credit & the Financial Conduct Authority - Briefing Paper
On 1st April 2014, the Financial Conduct Authority (FCA) assumed responsibility for the regulation of consumer credit in the UK. In doing so, it took over from the Office of Fair Trading. Their aim is to protect consumers, ensure the industry remains stable and promote healthy competition between financial services providers.
This succinct summary masks the reality that firms providing consumer credit facilities will need to consider their business models and strategies in the new environment. Significant change is inevitable across all firms providing consumer credit facilities; it is likely that the increased workload will mean that some firms will opt to cease their consumer credit activities.
The incoming regime arrived promising a significantly more rigorous and potentially intrusive enforcement regime to ensure the consistent delivery of 'good consumer outcomes' in all regulated consumer credit activities.
Whilst not outlining specific details, the FCA's principle-led approach demands a cultural shift from credit providers, backed up by processes and controls. The new regime will be more costly in time and money. To underpin the promise of change, the FCA is a regulator with a track record of active enforcement.
To continue offering credit facilities, all previously OFT regulated entities had to apply for 'Interim Permission' ahead of a move to a permanent regulated 'platform,' with a small range of options available, or to cease all credit activities.
The period 1st April to 30th September 2014, represents a 'grace' period during which the FCA expects all organisations with an interim permission to develop the necessary controls and processes to comply with the more rigorous standards expected. During the same period, the FCA will contact each interim permission holder with an outline 'landing slot' - the period in which they must complete their transfer to their new permanent regulated status.
New Regulated Status Options:
- Full Authorisation - operating to limited or full permission levels (dependent upon profile), capable of providing credit facilities in all circumstances and subject to direct FCA accountability
- Appointed Representative (AR) - operating as an 'agent' for an authorised Principal; the Principal will assume all regulatory responsibility, but will expect the AR to operate to authorised standards
- Introducer Appointed Representative (IAR) - a firm whose scope of appointment is limited to: effecting introductions to an authorised firm and distributing 'non-real time financial promotions'
The FCA's programme to embed cultural change and the specific initiatives that are part of or reinforce that will cause the greatest concern for a large number of firms, affecting so many aspects of a firm's business operation and management.
The key changes that the providers of consumer credit can expect are:
- The need to deliver an effective cultural change ensuring the needs of consumers are placed ahead of any other business imperative
- Compliance with a more rigorous authorisation and supervision regime designed to ensure enforcement of the customer focused priority that will require new levels of process and control implementation and training
- At least one person in an authorised firm will need to be approved by the FCA accountable for delivering and sustaining FCA standards
- Promotion of effective competition in the consumers' interests. The regulator expects far greater transparency. As an example, a credit broker must disclose to a customer in good time before a credit agreement or a consumer hire agreement is entered into, the existence of any commission or fee or other remuneration payable that could actually or potentially affect the impartiality of the credit broker; or have a material impact on the customer's decision
- A greater control on lending with additional checks on items such as affordability
- Delivery of greater clarity in the way in which finance is used to advertise the sale of products and availability of finance across all promotional platforms
- An increase in the cost of regulation
This brief summary does not do justice to the level of work required for compliance. Process, controls, training and a new ethos built around the customer will take time and resource to implement. The call to increase competitiveness and moves to increase transparency in areas such as commission and incentives stand to see firm's undertaking a radical review of their current business model in respect of how financial services are utilised.