The UK Government has announced plans to transfer consumer credit regulation to the Financial Conduct Authority (FCA) in April 2014, when the current regulator, the Office of Fair Trading (OFT), will cease to exist.
A consultation paper published by HM Treasury on 6 March outlines the overarching model and legislative framework underpinning the new regime (the Treasury Paper). A further blog will follow soon on another consultation paper, published by the Financial Services Authority on behalf of the FCA on the same day, outlining its proposals for the new system.
The OFT regulates the consumer credit industry in accordance with the Consumer Credit Act 1974 (CCA) and the myriad of statutory instruments made under it. The FCA will regulate the industry using an amended version of the licensing, supervision and enforcement regime set out in the Financial Services and Markets Act 2000 (FSMA) instead.
Some provisions in the CCA which cannot be easily replicated under FSMA and through FCA rules (for example, certain consumer rights and protections) will be carried forward to the FCA and continue to apply in the initial years of the new regime. The draft Financial Services Act 2012 (Consumer Credit) Order 2013 (annexed to the Treasury Paper) provides for how the retained provisions of the CCA will operate and be enforced. The government is, however, confident that many of these provisions can eventually be replaced by rules-based consumer protections. To this end it has imposed a requirement on the FCA to review, by 2019, retained CCA conduct provisions and to develop rules-based alternatives where possible.
Further draft secondary legislation (Financial Services and Markets Act 2000 (regulated Activities) (Amendment) Order 2013), concerned with transferring consumer credit activities into the FSMA framework and modifying how parts of FSMA are to apply to the sector, is also annexed to the Treasury Paper. This draft order amends relevant secondary legislation under FSMA and repeals provisions of the CCA which are incompatible with the new FSMA-based regime (for example provisions which relate to the licensing regime, which will be replaced by authorisation under FSMA). In particular, the FSMA model will be applied to consumer credit regulation as follows:
1) Rule-Making: the FCA will be empowered to make rules which are binding upon firms. These will be complemented by high level conduct requirements and Principles for Business, to ensure firms comply not only with the letter of the rules but the spirit of the wider regime. Breaches of rules can be penalised.
2) Authorisation: will replace licensing, and threshold conditions will be applied to set a bar higher than the CCA’s fitness test.
3) Approved Persons: for individuals who perform certain specified functions. Approved persons must pass the ‘fit and proper’ test for approval and then perform their controlled function in accordance with a set of standards.
4) Supervision: the FCA will take a risk-based approach to supervision, paying more attention to higher risk firms and less to those regarded as lower risk. Firms will have regular reporting requirements and be subject to ongoing supervision and monitoring. It seems likely, from the comments made by government ministers and the FCA itself, that it will take a much more intrusive and rigorous approach to the regulation of consumer credit firms and products than the OFT has traditionally taken.
5) Enforcement and Redress: the FCA will have a broader enforcement toolkit, with the power to bring unlimited fines (capped at £50k under the OFT), withdraw authorisation and bring criminal, civil and disciplinary proceedings. The FCA has been given the power to publish the fact that a warning notice has been issued to a firm in respect of disciplinary action. It also has product intervention powers allowing it to ban or impose requirements on financial products.