FCA Guidance on Consumer Credit Lending Authorisation

A key supporting document for applications to the Financial Conduct Authority for authorisation and permission to carry on a regulated activity is the 'regulatory business plan'. 

The requirements for what the plan must cover are usually summarised in various guidance, depending on the type of authorisation or permission being sought, but there's a lot of variation as most advisers have developed their own templates. 

Helpfully, however, the FCA has published a sample regulatory business plan for use by firms seeking authorisation/permission that is also useful for consumer credit lending, with a web page that also contains link to other relevant guidance for prospective lenders.

What is consumer credit lending?

This is a huge topic, but very broadly...

Permissions required for consumer credit lending activity will include entering into regulated credit agreements as the initial lender (under article 60B(1) of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) and/or buying or exercising the rights under pre-existing regulated credit agreements (under 60B(2)), subject to exemption under article 55 of The Financial Services and Markets Act 2000 (Exemption) Order 2001, for example). That deserves a post of its own.

A similar regime applies to regulated consumer hire agreements (under article 60N of the RAO), while hire purchase and conditional sale agreements are treated as regulated credit agreements.

There are also various related permissions that will likely be required to deal with credit agreements and consumer hire agreements, including credit broking (article 36A, RAO), operating a peer-to-peer lending platform (article 36H), as well as debt adusting (39D), debt counselling (39E), debt collecting (39F) and debt administration (39G). These activities and various exemptions also deserve their own post.

Regulated credit agreements do not generally include "exempt agreements" (based on many exemptions in articles 60C-60K of the RAO that would require yet another post), but carrying out credit broking in relation to exempt agreements is still a regulated activity, and facilitating entry into exempt agreements can also still constitute peer-to-peer lending.

There are also specific exemptions for consumer hire agreements (articles 60O-60R, RAO).

Regulated credit agreements and consumer hire agreements and so on are also subject to the Consumer Credit Act 1974 and related regulations, though some provisions (including those relating to the 'form and content' of agreements) will not apply to "non-commercial agreements" or exempt agreements (though some exemptions require certain declarations in the paperwork). The CCA also deals with pawn receipts, revolving credit (e.g. credit cards), small loans and so on - yet another whole post in itself.

Finally, the FCA's 'Handbook' of rules generally apply to authorised firms who conduct consumer credit/hire activity, as well as specific rules on consumer credit (CONC) which distinguish between different types of consumer credit (e.g. pawnbroking, high cost short term (payday lending) and P2P agreements) for certain purposes.

Please get in touch if any you need advice on any of this.

RegTech Bottleneck?

The UK's Financial Conduct Authority is rightly proud of its Innovation Hub, Regulatory Sandbox and new "RegTech" approach, which includes "managing regulatory requirements more efficiently, and... how we can best support developments and potentially adopt some RegTech solutions ourselves."

But the figures suggest that either more resources are required or there has to be a quicker route to market for new firms.

Of 413 requests received as at February, about 215 firms (52%) obtained support from the FCA's Innovation Hub. But only 39 firms (18%) have either been authorised (18) or are going through the approval process (21).  And in a recent statement defending its record on processing applications for authorisation by P2P lending platforms, the FCA said that it has only processed 8 of 94 applications received (about 9%).

Something is gumming up the works!

In its statement on the P2P lending process, the FCA bravely claims that it is "taking a proportionate approach to regulation, recognising the need for consumers to be adequately protected and have the information they need". It has a deadline of 12 months to decide on applications (actually 6 months for complete applications). But it's not like these firms are trying to flout the law - they have willingly approached the FCA for approval. Indeed, the P2P lending industry spent years lobbying for regulation of the sector, which was introduced by the Treasury in early 2013 and took effect on 1 April 2014. Yet since then the FCA's figures suggest that over 40 new firms have applied to enter the market and 42 of them are unable to trade because their application to do so is yet to be approved. Another 44 firms are still relying on their interim permission by virtue of being licensed under the previous regulatory regime, and therefore (ironically) cannot offer the new Innovative Finance ISA because they are not yet fully authorised.

How many firms are able to persist against these regulatory headwinds remains to be seen, but the approach seems neither proportionate nor worthy of the FCA's ambition to foster innovation and competition for the benefit of consumers. So far, the traditional players remain pretty safely sheltered behind the FCA's regulatory wall.

Something must be done.

Either the FCA needs more resources or it must adopt a more expeditious approach to granting regulatory approval - a mechanism that allows firms to begin trading more quickly under certain thresholds, for example, as is the case with small payment institutions and small e-money institutions. Indeed, payment services firms enjoy their own regulatory regime (with a 3 month turnaround time for complete applications); and the P2P industry lobbied for that regime to be used as the basis for regulating their platforms - an approach which the French and Spanish have since adopted and the European Banking Authority supports.

FCA Clarifies (A Few) Misunderstandings On #ConsumerCredit

The Financial Conduct Authority has attempted to clarify some of the misunderstandings about who needs consumer credit permission and the interpretation of its rules and guidance on assessing creditworthiness and affordability. This is very helpful, but frankly has barely scratched the surface.

Long standing official resistance to shifting the regulation and supervision of consumer credit to the Treasury/FSA meant there was little time to do more than 'drag and drop' the old Consumer Credit licensing regime operated by the Office of Fair Trading into the FCA's world. But a lot less drag and a lot more drop would have saved great deal of time and expense.

Meanwhile, the confusion over permissions required and the 6 to 12 month authorisation time is driving many new entrants to launch into business lending space even where they would prefer to focus on consumers, sole traders and small partnerships.

The Innovation Hub is a great initiative, and a number of clients have taken advantage of this so far, but let's hope there is a solid programme for clearing the regulatory drag that is inhibiting more competition and innovation.

Timetable And Forms For Full Authorisation - #ConsumerCredit #P2PLending

The FCA has published the application 'windows' during which various types of consumer credit and P2P lending firms can apply for full authorisation. 

The dates are in Table on page 9. They vary by type of firm and may also vary by region for some types.

The FCA will write to all firms with interim permission by 1 May 2014 to confirm their application period. You should contact the FCA if you have not heard by 15 May 2014. In the meantime, you should register for an online account with the FCA.

In my experience it takes at least 3 months to prepare an application for authorisation, as there is a lot of information to gather and/or summarise at the same time as running a business. The FCA has published an authorisation application checklist, some sample forms and guidance on the supporting documentation required. Note that if you a P2P lending platform or your are offering high cost short term credit (payday loans) or a credit reference service, you will also need to complete a detailed description of your IT controls, which you can download here. There are a few FAQs here. 

Top tip: make your application for authorisation a proper project and start the process of completing all forms and supporting documents on Day One - especially the application form, regulatory business plan and IT controls forms. Complete the forms in parallel, not one after another, as you may be waiting 3 months before each form is complete. I recommend nominating one person to oversee completion of the application documents and a separate person to gather and provide data.

Please note that the FCA has also published the relevant information sheets that must be sent to a consumer with any notice that they are in arrears or default (under section 86A of the Consumer Credit Act 1974).