SRA Consumer Credit Proposals
This month has seen the publication by the SRA of a consultation on the regulation of consumer credit activities. In that consultation, the SRA has proposed that it should stop regulating consumer credit activity from April 2015. Instead it will require that those firms wishing to carry out such work after that date be authorised directly by the Financial Conduct Authority (FCA).
The implications of this proposal are far greater than might at first appear and the effect, if the proposals are implemented, will be to place a far higher regulatory burden upon a wide range of firms – not just those involved directly in consumer credit related work.
Thus, any solicitor involved in consumer credit or brokerage work, debt adjusting/counselling work, debt administration and the provision of credit information services to clients will be caught – as will many other firms involved in debt recovery, family disputes involving finances and, in some circumstances, even those firms who allow clients to pay their costs by instalments.
The provisions governing this area are to be found in the Consumer Credit Act 1974 (CCA) and the Financial Services and Markets Act 2000 (FSMA).
The history to this decision goes back to the government’s decision to pass the responsibility for the regulation of consumer credit from the Office of Fair Trading (OFT) to the FCA on 1 April 2014. Under the OFT regime, solicitors were regulated under a group licence given to the Law Society and managed by the SRA. However, the FCA has decided not to continue with the group licence approach – despite arguments put forward to them by the SRA and Law Society.
Under the old regime, provided that they were overseen by their professional body and observed OFT guidance, firms were able to undertake a certain types of consumer credit activity without needing an individual licence. Thus, the SRA had responsibility for ensuring not only the competence and integrity of those undertaking consumer credit work but also that such work was carried on under the terms of the group licence. Issues relating to any firm’s consumer credit activity was referred to the OFT so that they could make an assessment and where necessary vary the group licence so as to exclude a member from the group. This had the knock on effect of meaning that the SRA relied upon OFT expertise rather than developing its own.
However, from 1 April 2014 any firm carrying on regulated consumer credit activities was required to meet one of four criteria, namely:
- That it was authorised by the FCA with the appropriate permission;
- That it had been granted interim permission by the FCA;
- That it was exempt under the SRA’s arrangements made under Part 20 of FSMA; or
- That it had ceased carrying on consumer credit activities.
Transitional provisions within the SRA’s Financial Services (Scope) Rules 2001 came into effect on 1 April 2014 allowing firms to rely on the Part 20 exemption until 1 April 2015.
As a result, if the SRA wish to continue to regulate the consumer credit activities of those firms it regulates for other purposes, it will be required to put in place new regulatory arrangements governing how those firms carry on consumer credit activities and those arrangements will need to be approved by the FCA. The argument put forward by the SRA for not doing this is that its approach to regulation is radically different from that of the FCA, it would be too difficult for it to incorporate such requirements and the cost of acquiring the expertise that it would need to do so would be disproportionately large.
Increasingly the SRA has, as it has said in the consultation, “focused on developing and delivering regulation that is proportionate to the nature of an entity, the services it provides and the associated risks and has generally led to the removal of detailed and prescriptive rules. By contrast, the FCA’s arrangements for consumer credit impose detailed obligations on those it regulates. It is difficult to see how two such different approaches can be reconciled to provide coherent and consistent arrangements.”
Of course, the problem with this approach lies in the fact that many of those providing legal and other professional services engage in consumer credit activities as part of the normal practice. They do not even necessarily regard themselves as undertaking consumer-credit activities.
What is a consumer credit agreement?
A consumer credit agreement at its most basic is any agreement by which one person provides credit to another. From a solicitor’s point of view, this applies to quite a wide range of financial arrangements – many of which occur in the normal course of a solicitor’s business. Thus, among the activities included are:
- Credit broking – that is to say where the solicitor refers the client to a third party lender;
- Debt related consumer credit activities including:
- debt adjusting – where the solicitor negotiates terms with creditors on the client’s behalf for settlement of the debt due under a specific regulated credit or consumer hire agreement;
- debt counselling – where the client is advised about the liquidation of a debt due under a specific regulated credit or consumer hire agreement; and
- debt collecting – where the solicitor assists the client to collect debts due under a regulated credit or consumer hire agreement.
- Entering into a regulated credit agreement as lender – something which can occur simply by allowing a client to pay professional fees by instalments;
- Providing credit information services – for example where a solicitor helps a client to amend credit information agency data.
Under the current arrangements, solicitors have been able to undertake those types of consumer credit work regarded as exempt under Part 20 of the FSMA and thus regarded as activity to which the FSMA does not apply. These exemptions have been embodied in rule 4.1 of the SRA Financial Services (Scope) Rules 2001. This states that:
A firm which carries on any regulated activities must ensure that:
- the activities arise out of, or are complementary to, the provision of a particular professional serviceto a particular client;
- the manner of the provision by the firm of any service in the course of carrying on the activities is incidental to the provision by the firm of professional services;
- the firm accounts to the client for any pecuniary reward or other advantage which the firm receives from a third party;
- the activities are not of a description, nor do they relate to an investment of a description, specified in any order made by the Treasury under section 327(6) of FSMA;
- the firm does not carry on, or hold itself out as carrying on, a regulated activity other than one which is allowed by these rules or one in relation to which the firm is an exempt person;
- there is not in force any order or direction of the FCAunder sections 328 or 329 of FSMA which prevents the firm from carrying on the activities; and
- the activities are not otherwise prohibited by these rules.
Section 327 of the FSMA sets out the conditions for exemption. The Scope Rules, provide that the activities specified in the FSMA Regulated Activities Order (Specified Activities) 2001 are to be exempt.
However, the Part 20 exemptions only apply where those relying upon them are members of a designated professional body (DPB). The FCA has made it clear that for the SRA to satisfy its requirements, and to become a DPB in relation to consumer credit activities, it would have to incorporate the whole, or substantial parts, of the FCA’s consumer credit activities sourcebook (CONC) into the SRA Handbook.
What is the SRA’s problem?
As mentioned above, the SRA take the view its approach to regulation is radically different from that of the FCA and that as a result it would be too difficult for it to incorporate such requirements and the cost of acquiring the expertise that it would need to do so would be disproportionately large.
The SRA feel that the FCA’s regulatory regime for consumer credit is very prescriptive one and one which would be at odds with the SRA’s own outcomes-focused approach. The SRA also have stated that “we do not have the resources to develop and replicate the expertise that FCA has, or to regulate in the way that appears to be required. Ultimately, that would put the consumer at risk if it diverts resources from our core activities in the legal market.”
The final reason why the SRA is not keen to go down the DPB route is that they would become responsible for the supervision and enforcement of rules over which they had no control and which would not have been debated by the SRA Board or had input from the Law Society.
In their consultation, the SRA state:
“We do not believe that we should take on these additional responsibilities unless we are satisfied that it is in the public interest to do so and that it is necessary for professional firms to comply with a prescriptive set of rules. So we are proposing that those of you we regulate and who carry on regulated consumer credit activities should in fact seek authorisation directly from the FCA, rather than us adopting the CONC into our Handbook so you can rely on the Part 20 exemption.”
So where does that leave solicitors?
The SRA have indicated that they will continue their discussions with HM Treasury and the FCA and continue to try and persuade them to allow firms to continue to rely on the Part 20 exemption for the purposes of consumer credit. If they fail to do so, then either the SRA will need to accede to the FCA’s requirements to incorporate CONC into the SRA Handbook and for the SRA to become a DPB or, all firms carrying on regulated consumer credit activities will, from 1 April 2015, need to seek FCA authorisation.
That is what the consultation is about.
The consultation comes to an end on Monday 15 December 2014.
It is important that any firms concerned about the possibility of any gap between the 1 April 2015 (the date when the transitional provisions come to an end) and the date on which they are able to obtain authorisation from the FCA direct should apply to the FCA as soon as possible for authorisation. They should NOT wait until the outcome of the consultation is known.
That means ALL firms likely to be affected not just those who undertake specific consumer credit activities – i.e. those involved in family work where they advise on financial matters and those who accept the payment of their fees by instalments.
It is fair to say that the Law Society are not happy with the stance that the SRA are taking. Law Society President, Andrew Caplen, said:
‘It is disappointing that against a rhetoric of cutting red tape, solicitors are to be faced with the difficult and unwelcome prospect of double regulation. We urge members to consider the impact of the proposals in the SRA’s consultation, which includes the difficult choice between regulation by the FCA or expensive and complex changes to the SRA’s own system.
‘In their responses, solicitors should also stress where they need more clarification of exactly what circumstances would require them to register with the FCA.
‘In the meantime, we will continue to make representations to government and the FCA on our members’ behalf and will be responding to the SRA’s consultation.’
Full details of the consultation can be found on the SRA web site.