Regulation of consumer credit activities
The Solicitors Regulation Authority has reached an agreement with the Financial Conduct Authority to extend the transitional arrangements for consumer credit work until 1 April, 2015.
The 1 April saw the transfer of responsibility for the regulation of consumer credit activities from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA), the practical effect of which is that those consumer credit activities previously licensable under the Consumer Credit Act 1974 are now regulated activities under Financial Services and Markets Act 2000 (FSMA).
From the perspective of solicitors, this means that firms that were previously authorised to carry on consumer credit activities under an OFT group consumer credit licence which was held by the Law Society are no longer authorised. The Treasury and the FCA have confirmed that no equivalent group licence exists.
The practical implication of this is that firms undertaking activities such as consumer credit, credit brokerage, debt adjusting and debt counselling, debt collecting, debt administration and provision of credit information services must either be authorised by the FCA or rely on the exemption allowed to the professional bodies under part XX of the FSMA (which includes the Law Society – through the SRA – or stop carrying on consumer credit activities.
To be exempt under part XX then firms must comply with the conditions set out in sections 327 and 332(4) which include that the activities in question arise out of, or are complementary to, the provision of that service to a particular client and that the firm does not receive from a person other than the client any pecuniary reward or other advantage without accounting for it to the client. In addition the manner of the provision of any service in the course of carrying on the activities must be incidental to the provision by the firm of professional services and that the firm does not carry on any activities regulated by the FCA other than those permitted under Part XX of the FSMA.
Although transitional arrangements have been put in place these will only apply until 30 September 2014 – by which time firms must have put their house in order.
Guidance has been produced by the FCA – Do I need to be authorised? – which sets out what the FCA regard as regulated activities. The FCA also produces a comprehensive, if rather confusing, decision tree to assist in the process. Guidance, updated at the beginning of this month, has also been produced by the SRA (which can be found at www.sra.org.uk/sra/policy/regulation-consumer-credit-activities.page) and changes to the Scope Rules and the SRA Handbook Glossary 2012.
Inevitably there is, and will no doubt continue to be, confusion as to which firms need to apply for a licence and which are covered by the part XX exemption. Does it, for example, cover debt collection activity as a main practice?
The SRA have produced some Q&As which would seem to indicate
“that firms that specialise in debt collecting as their main activity will not be able to satisfy the “incidental manner” condition in Part 20 and will need to be authorised by the FCA. However, the more difficult area is where debt collecting does not form a major part of the firm’s income.”
A similar issue surrounds firms who do work that arises from a consumer credit or hire agreement. Here the SRA Q&As state:
“You should be able to do this without carrying on a regulated consumer credit activity as the secondary legislation that brings consumer credit activities within the FCA regime excludes consumer credit activities carried on by solicitors in the course of contentious business (“contentious business” – as defined in section 87(1) of the Solicitors Act 1974). This carries over the exemption in section 146 of the Consumer Credit Act 1974.
The exclusion applies to various consumer credit activities, including debt collecting, but will only be available where proceedings have been issued and will not exclude the pre-issue work. The SRA’s view is that firms that carry on, for example, debt collecting activities for clients in matters that do not result in the issue of proceedings will be carrying on regulated activities and will only be able to rely on the Part 20 exemption where those activities “…arise out of, or are complementary to…” another service provided to that client. It may not always be possible to satisfy this requirement.”
The complete Q&As can be found at www.sra.org.uk/solicitors/handbook/finserscope/resources.page.
No doubt all of these issues will be the subject of discussion over the coming months, so keep an eye on the SRA resources pages.