X
    X
    X
    X

    Limitations on debt permissions

    Locke Lord Publications

    Click here for PDF

    In a rather low key announcement back in March, the FCA announced changes to the limitations system it has in place for full permission credit brokerage firms with debt permissions. In practical terms these changes could significantly affect dealers and require action to be taken by them to comply with the modified requirements of the regulator.

    When applying for authorisation and permission from the FCA to engage in regulated activity, most dealers would typically have applied additionally for permission to engage in the activities of Debt Adjusting and Debt Counselling. These permissions are typically required if a firm intends to reschedule a customer’s existing debts as part of a new finance agreement. Lenders that reschedule a customer’s existing debts with a separate lender would also typically be required to hold these permissions.

    During the 2014-2016 application process, the FCA gave firms applying for permission to engage in Debt Adjusting the option of applying for a limitation on the permission that limited them to debt adjusting with no debt management. This limitation reflected what most firms understood to be the accepted position; principally that debt management was an activity engaged in by firms assisting a customer in financial difficulties with restructuring their debt. The 2014-16 limitation was in place to restrict firms that were solely engaging in the rescheduling of an existing debt under a new agreement from being able to hold client money in the same way that a pure debt management firm can.

    Over the course of the 2014-16 process the FCA appears to have revised how it applies the term ‘debt management’. Throughout this has meant:

    “the activities of debt counselling or debt adjusting, alone or together, carried on with a view to an individual entering into a particular debt solution or in relation to any such debt solution, and activities connected with those activities.”

    During 2016 however, and culminating in the FCA’s announcement in March 2017, the FCA’s application of the definition has been expanded so that the term ‘debt solution’ now appears to include circumstances where:

    I .a credit broker assists a customer in rescheduling an existing debt under a new agreement; or 

    II. as part of a new finance agreement, a funder reschedules an existing debt due to a different funder.

    As a result of this repositioned approach on ‘debt solutions’, new debt limitations are now in place. For firms this means reviewing their activities and deciding whether their current permissions require one of the new limitations to be added. The new limitations are:

    For firms who only broker Asset Finance - Limited to the sale of goods

    1. Debt Adjusting
    This permission is limited to debt adjusting which is provided in connection with the whole or partial settlement of credit agreements in relation to the sale of goods. 

    2. Debt Counselling
    This permission is limited to debt counselling which is provided in connection with the whole or partial settlement of credit agreements in relation to the sale of goods.
    For firms who only brokers Vehicle Finance - Limited to the settlement of vehicle finance

    3. Debt Adjusting
    This permission is limited to debt adjusting which is provided in connection with the whole or partial settlement of credit agreements for vehicle finance.

    4. Debt Counselling
    This permission is limited to debt counselling which is provided in connection with the whole or partial settlement of credit agreements for vehicle finance.

    For firms who broker unsecured loans for businesses (i.e. not secured against any type of asset/vehicle) - Limited to no debt management plans

    5. Debt Adjusting
    This permission is limited to debt adjusting which is provided in connection with the whole or partial settlement of credit agreements for vehicle finance.

    6. Debt Counselling
    This permission is limited to debt counselling which is provided in connection with the whole or partial settlement of credit agreements for vehicle finance.

    If one of the new limitations is applicable, firms that already have permission to engage in debt adjusting and/or debt counselling can change the relevant limitation by emailing the FCA. A full variation of permission will not be required, and the FCA has advised that there will be no charge for this alteration to the firm’s permission.

    If these changes result in a firm being categorised as a ‘debt management firm’, additional requirements may however also apply. The most significant of these concerns approved persons, as a debt management firm requires a CF10 (Compliance Oversight Function) approved person to be appointed. Firms should therefore seek guidance as to whether this is necessary and the steps required to effect such a requirement.

    Our understanding is that the FCA will permit a period of regulatory forbearance to allow firms to assess whether they need to notify the FCA about any potential change in their limitations. Unfortunately, no guidance has been given by the regulator as to a reasonable timeframe for firms to conduct such an assessment. Firms should therefore address this question as soon as possible.

    Timothy Anson, London, Paralegal also contributed to this article.

    Explore Additional Topics

    Disclaimer

    Please understand that your communications with Locke Lord LLP through this website do not constitute or create an attorney-client relationship with Locke Lord LLP. Any information you send to Locke Lord LLP through this website is on a non-confidential and non-privileged basis. Therefore, do not send or include any information in your email that you consider to be confidential or privileged.