Responsibility for consumer credit moves from the OFT to the FCA on 1 April 2014. Final guidance on the subject is not expected until the end of March but in the meantime firms that continue to be active in this space are applying to the FCA for interim variation of permissions.
In FSMA, regulated firms acting outside of their permissions are generally only committing a rule breach, e.g. an investment firm giving mortgage advice without permissions is in breach of the regulators’ rules. However, consumer credit is treated more seriously, in that anyone undertaking consumer credit activity without the relevant permissions will be deemed to be committing a criminal offence.
Notwithstanding this, we do not believe it is right that firms should hold a Consumer Credit Licence because of uncertainty about whether they are providing credit or not.
Definitions around consumer credit activity are anything but clear. Adviser charging has been an area of concern. We are seeing a range of remuneration models, some of which require a CCL and some which do not.
So how do your remuneration models sit with the CCA?
We have taken advice and feel confident about where the dividing line falls. Where a client settles an invoice as it becomes due, no credit is given therefore it is not subject to the CCA. Similarly, subscription or retainer models, where regular payments are made for an on-going service that can be switched off at any time without the client having an outstanding financial liability, are not credit arrangements and will not require a CCL.
The concern some firms may have with such a model is that the client walks away before the cost of any service already provided is covered.
The key question to ask where payment is spread over time is: does the client have an outstanding financial liability to me? If repayment is stopped part way through the schedule and the client still owes money, then credit has been provided and the arrangement is subject to the CCA.
There is an exemption for up to four instalments over a 12 month period but by allowing payment of an outstanding debt in more than four instalments (even if over a shorter period) an appropriate CCL will be needed.
If payments are facilitated through providers the same tests apply. If payments stop and the client has an outstanding financial liability, credit is being granted and the CCA applies.
If you decide that you are granting credit and are subject to the CCA you will need to ensure that your documentation complies with the Consumer Credit Regulations. Failure to comply means that agreements are unenforceable in law.
Other activities carried out by intermediary firms, such as debt counselling and advice, are also subject to the CCA and we are seeking clarification from the FCA regarding how far advisers can go in discussing debt issues before permissions are required.
Consumer credit is very much a “watch this space” subject.
Linda Smith is senior technical adviser at the Association of Professional Financial Advisers