FCA: Changes to Consumer Credit
In April this year, the Financial Conduct Authority (FCA) took over regulation of consumer credit from the Office of Fair Trading (OFT). If your shop allows customers to pay by credit then this could affect your business. If so, there are steps that you will need to take in the year ahead to make sure that you stay within the law.
Background on the FCA
The change was made by the Government so that all consumer-facing financial regulation would be the responsibility of one organisation – the FCA.
Our aim at the FCA is to make the markets we regulate work well. This means that we are here to ensure that consumers are protected, firms operate with integrity and that competition is effective.
The way we regulate is different to the OFT. Firms have to meet higher standards before they are allowed to offer financial services, there is more scrutiny of them once they are operating, and we have more powers to bring wrongdoers to task. All of this is proportionate and our focus is on firms where the risks to consumers are greatest.
Next steps for retailers
If your firm held an OFT consumer credit licence, you should have registered with us before we took over in April so that you now have ‘interim permission’. This allows you to carry on consumer credit-related regulated activities in advance of going through the formal authorisation process that all FCA-regulated firms need to pass.
Now is a good time to start preparing your firm for applying for authorisation if you need to.
What regulation covers
It is important to first establish whether your firm is conducting consumer credit-related regulated activity, because this will determine whether you need to apply for authorisation.
The range of firms that consumer credit regulation covers is very broad. Consumer credit does not just cover cash loans, it covers other arrangements where the lender gives the borrower time to make a payment, and where payment is deferred.
For example, if you allow customers to pay for a TV by instalments, you could be entering into regulated credit agreements as ‘lender’.
Regulated credit activities also include introducing a customer to a lender. So if you introduce customers to a finance company to help them pay for a TV, you could be acting as a ‘credit broker’.
There are some exemptions from regulation, and you do not need to be regulated if you simply allow customers to pay by credit card.
The way to check where your firm fits within FCA regulation is to visit the do I need to be authorised section on the FCA website.
If you have decided that you are carrying on a regulated credit activity, or you plan to do so, then there are broadly three options.
Option 1. Become authorised.
If you have interim permission, you will need to apply during the application period that we have allocated to you. It is really important to make the deadline. If you miss it, there is no leeway for the FCA to extend it, and you must stop offering credit.
Applying involves filling in an online application, explaining how your business works and how you make your money. We need this information as it is our duty to make sure that only firms that meet certain minimum standards can offer financial services.
If you need to apply, you should visit our website www.fca.org.uk/creditready for help in how to preparing for your application.
Option 2. Become an appointed representative
This is a formal arrangement that allows a firm to carry on regulated activities using another firm’s authorisation, because it has an agreement to act as its appointed representative. The authorised firm is known as the principal firm, and assumes regulatory responsibility for its representative.
Option 3. Stop carrying on regulated activities.
Firms that do not carry on regulated activities will not need to apply for authorisation.
Full and limited permission
If you apply to the FCA, you will need to choose which type of authorisation you require: either full or limited permission.
Full permission firms can carry on riskier activities – such as lending with interest and charges. They have to fill in a more detailed application form, pay higher fees, have more individuals approved by us and report more information to us once they are authorised.
Most retailers are likely to be limited permission. This covers firms that offer credit alongside other goods or services that they supply. So a shop that offers credit to customers buying something from them, and applies no interest or charges, can apply for limited permission. There is a more straightforward application to complete, reduced approved person requirements, lower fees and fewer reporting requirements once authorised.
We have a decision tool on our website to help you work out whether you will need full or limited permission.
If you apply you will pay us an application fee and then an annual fee each year that you are regulated.
Your fees will cover our costs as a regulator, because we are funded by the firms we regulate and not by taxpayers.
The fees we charge will be based on your income from regulated activities and the level of permission that you have. The basic principles are that the fees should reflect the level of risk in a firm and the amount of regulated business it carries out. This means that firms with limited permission pay lower fees than full permission firms; and firms that carry on a smaller amount of consumer credit activity pay less than firms that carry on a lot. This allows most smaller firms to pay our minimum fee.
Measuring ‘consumer credit income’
There is a complication for retailers that act as ‘credit brokers’ and offer interest free credit. They often do not receive an income from interest or charges in the traditional sense, like other consumer credit firms. So we have had to find a new way of measuring their consumer credit activity so that we can apply our fees fairly.
If we did not do this, all retailers, large and small, would pay our minimum fee, regardless of the number of consumer credit loans they introduced customers to.
The way we will measure the regulated activity of retailers that introduce a customer to a lender for an interest free credit deal is by introducing what we call the ‘lender’s credit broker charge’. We consulted on how this would work earlier in the year, and received helpful feedback from firms and trade associations.
This charge measures the difference between the amount lent to the customer and the amount the retailer has taken from the finance company. So if a retailer arranges a loan for £1,000 to enable a consumer to purchase goods from it priced at £1,000, it may receive only £950 directly from the lender as payment for those goods, with the lender keeping the £50 difference in lieu of interest. The lender should in turn report the £50 as part of its income from consumer credit lending, along with any penalties, interest or other charges it imposes subsequently, but the retailer should also report the £50 under ‘income’ as a measure of the regulated activity of credit broking.
Application and annual fees
Using this measure, many smaller RETRA members will likely still pay our minimum fees when they apply and each year they are regulated.
If you are limited permission firm then your application fee will be £100 if your consumer credit income is £50,000 or under; if it is over £50,000 it will be £500.
Once you become authorised you will start paying annual fees to us. If you qualify for limited permission then the fees will vary depending on your consumer credit income: up to £10,000 of income means an annual fee of £100; £10,000 to £50,000 is £250; £50-£100,000 is £400; and £100-£250,000 is £500. There is an additional variable fee on income over £250,000. If you are full permission then the fees will behigher and if you are an appointed representative you will not pay us any fees.
Once authorised you will need to start reporting information to us and will be assessed by us on a regular basis to ensure your firm is meeting its regulatory obligations. You can find out more about our regulatory approach by reading the guide for consumer credit firms on our website.
We will continue to work with RETRA to help ensure you manage your way through FCA regulation and to help you when the time comes for you to apply.
For further advice and information on this subject, please contact the FCA directly on 0845 606 9966