FCA - CP 13/7 - High-level proposals for an FCA refime for consumer credit
Summary of response
Currently, credit unions are not required to hold a consumer credit licence for their debtor-creditor lending activities which make up the bulk of the credit they extend. This exemption is provided for by the Consumer Credit (Exempt Agreements) Order 1985 as amended in 2006. This is in consideration of the fact that credit unions operate, uniquely in the UK, under an interest rate ceiling and in competition with high-cost alternatives. As such, the exemption from consumer credit is an instrument of proportionate treatment for the sector in consideration of their social objectives and otherwise-restricted activities. We welcome HM Treasury’s decision to maintain this exemption under the FCA regime.
There are, however, some activities engaged in by credit unions – principally debtor-creditor-supplier agreements and debt advice services – which do require a licence and which, therefore, credit unions will require FCA authorisation to continue performing under the new regime. As firms already regulated by FCA, we envisage that credit unions will be well-placed to comply with the new FCA consumer credit regime. However, there are some areas which cause us concern.
Firstly, we would like to emphasise the importance of a proportionate approach to the regulation of consumer credit. This is particularly important for smaller firms, such as credit unions. The cost and burden of regulation is rising all the time and makes it increasingly difficult for small financial services firms to remain viable. Given the efforts of Government to support the expansion of credit unions, it is important that disproportionate regulatory burdens do not act against the process of modernisation and expansion while, at the same time, promoting high standards.
Secondly, we would like to suggest that the FCA consider classifying credit unions’ informal debt advice services (which are generally provided in support of their lending and as part of their member-oriented, social approach) as not-for-profit services and, as such, enjoy treatment under the limited permissions regime. Credit unions only engage in this activity in order to support over-indebted members to regain control of their finances, often in conjunction with consolidating finance at much-more-preferable rates of interest and, since all credit union profits are redistributed across the membership or ploughed into improved services, we feel that there is a strong case to say that this is a non-profit activity.
Finally, we have some concerns around the proposal to begin levying a £350 interim permission fee from credit unions for their authorisation for consumer credit activities where the OFT has historically approved credit unions free of charge and the wider PRA and FCA regulatory regime affords credit unions special treatment for regulatory fees. For instance, the very smallest credit unions pay only £160 in total for their regulatory oversight from both the PRA and FCA for their core activities – it seems absurd that the approval for an ancillary debt advice service under consumer credit regulation is more than double the deposit-taker fee.
Q1: Do you agree that our proposals strike the right balance between proportionality and strengthening consumer protection?
We are broadly satisfied that the proposals strike an appropriate balance between proportionality and consumer protection. We are particularly pleased that efforts have been taken to ensure that the transitional period is conducted smoothly to minimise disruption in the market.
Q2: Do you agree that we have included the right activities in the higher and lower risk regimes?
We would like to suggest that credit unions’ debt advice activity should be considered a not-for-profit service and, therefore, regulated under the lower-risk category. Credit unions only engage in debt advice services as an auxiliary function to their activity in extending affordable and responsible credit in competition with high-cost alternatives and as a means by which they assist people to take control of their financial affairs and escape unmanageable debts, often in conjunction with a low-interest (capped by statute) consolidation loans.
Q3: Do you agree that our proposals minimise the impact on competition within the regulated consumer credit market?
We would tend to agree that the proposals minimise the impact of the new regime upon competition in the short-run. However, the new regime will necessarily represent more burdensome requirements as compared with previous regime, particularly in terms of the standards required for approval and authorisation and, as such, will have some impact on reducing competition in the market.
There is a trade off here between improving standards and reducing competition in the market through more rigorous oversight and, given that the new regime is designed to drive up standards of oversight and supervision, it cannot be avoided that the number of providers in the market will be reduced to an extent as a result. We do not think that the proposed regime represents an unduly burdensome compromise in this respect.
Q4: Do you have any comments regarding our proposals for the interim permission regime?
The interim permission regime seems to strike a sensible balance between the interests of maintaining stability in the market and not unduly disrupting the supply of credit while requiring sufficient information from firms.
It is vitally important that efforts are made to ensure that the process is clearly articulated to firms, particularly smaller firms like credit unions, to ensure that they are aware of the expectations upon them as they move through the procedure. ABCUL would be happy to facilitate communication of this to our members as the 1 April 2014 start date approaches.
Q5: Do you agree that we should apply the Threshold Conditions as proposed?
The proposed application of the Threshold Conditions seems appropriate to us. All credit unions will already have met the Threshold Conditions required for deposit-takers and, therefore, we are confident that our members should be in a position to satisfy the Threshold Conditions for consumer credit also.
Q6: Do you agree that it would be appropriate for the FCA to apply the approved persons regime activities as proposed?
As above, since credit unions are already regulated for their deposit-taking activities, we are confident that the approved persons’ regime as proposed should not represent any significant compliance issues for our members.
Q7: Do you agree with our proposal not to apply a customer function to any consumer credit activity, particularly debt advice?
We are broadly satisfied with this proposal.
Q8: Do you agree with our proposed approach to appointed representatives and multi-principal arrangements?
Q9: Do you agree with our proposed approach to self-employed agents?
Q10: Do you agree with our approach to professional firms?
Q11: Do you agree with our proposal to apply prudential standards to debt management firms only?
We agree that only debt management firms – as firms potentially holding clients’ money – are those that require prudential standards to be applied.
Q12: Are there any difficulties in collecting data on the size of debt contracts being negotiated and/or the amount of client money held (as the basis for our prudential standards)?
Q13: Are there other measures that would ensure our prudential regime for debt management firms targets the firms that pose the greatest risk to consumers?
Q14: Do you agree with our proposals that the new high-level conduct requirements should apply from 1 April 2014?
We are satisfied with this proposal since our members are already required to meet the high-level conduct requirements through their approval and regulation as deposit-takers.
Q15: Do you agree with our proposed approach to financial promotions?
We await the autumn consultation but are broadly satisfied that the general FCA approach to financial promotions should be extended to consumer credit.
Q16: Are there provisions within industry codes that you think should be formally incorporated into FCA rules and guidance?
We have no specific suggestions in this respect but would support the general proposal to use industry codes as a basis from which to begin to consider standards which FCA should enshrine in its regulations.
Q17: Do you agree with the different standards that we propose to apply to different types of debt advice?
We would be generally in favour of the approach whereby debt advice which advises on the liquidation of debts through a formal insolvency or other procedure should be subject to a different set of requirements to those otherwise advising on debts. Credit unions which provide this service generally would only perform the latter of these functions and do not advise their members towards insolvency or formal debt liquidation.
We use this opportunity to reiterate our suggestion that credit union services in this area should be considered not-for-profit and therefore subject to limited permissions. Credit unions are only involved in this activity as a means of supporting the financial well being of their members and as a mechanism to support people to regain control of their finances and there is no suggestion that credit unions are profiting from this process.
Q18: Do you agree with our proposed approach to applying client asset rules to debt management firms?
Q19: Do you have any comments regarding our proposed approach to peer-to-peer platforms?
Q20: Do you agree with our proposed approach to authorised firms which outsource the tracing of debtors to third party tracing agents?
Q21: Do you have any comments regarding our proposed approach to supervision and regulatory reporting?
We have expressed our views in respect of the general framework for firm supervision under FCA in various previous consultations on regulatory reform. We are broadly satisfied with the outcome, however, we are very keen to ensure that small firms, such as credit unions, are treated proportionately and would reiterate this here.
In terms of regulatory reporting, we feel that a balance needs to be struck between the data that FCA requires and the benefit of that data being provided as against the burden that providing that data will impose upon firms. While we appreciate that extra data will be useful to FCA in performing its regulatory function, it would be inappropriate if the requirement to provide that data inhibited a firms ability to function effectively.
Q22: Do you have any comments regarding our proposed approach to enforcement?
We are satisfied with the enforcement proposals and feel that the broader toolkit provided by the FSMA regime should allow FCA to improve standards in the consumer credit industry.
Q23: Do you have any comments regarding our proposed approach to complaints and redress?
We are happy with these proposals.
Q24: Do you have any comments on our proposed approach to tackling financial crime?
We have no strong views here.
Q25: Do you have any comments on our proposed interim permission fees?
We do not agree with the proposal to require credit unions to pay a £350 interim permission fee. Credit unions are only required to seek approval for auxiliary consumer credit activities and have been afforded a free-of-charge licence by OFT as a further element of the sector’s proportionate treatment.
It does not appear fair or appropriate to now charge credit unions £350 for what they have had free in the past and there does not appear to be any rationale provided as to why this change of policy has been suggested. Indeed, it seems absurd to us that the smallest credit unions will go from paying nothing for their consumer credit licence to paying more for this than for their approval as a regulated deposit-taker.
We urge the FCA to reconsider this suggestion.
Q26: Do you agree with our proposed approach for the FOS general levy for firms with an interim permission?
We are happy that no new charges are proposed here in the interim. We would suggest that the waiver for credit union fees should be maintained for FOS fees relating to consumer credit.
Q27: Do you agree with our market failure analysis?
We agree with much of the market failure analysis. While consumer credit works well for most consumers, there are many for whom it can cause significant detriment. Our primary response to the analysis is that, while market failures – such as those experienced in relation to payday lending, for instance – must be addressed by a regulatory response, it is also important to support and not over-burden those socially-motivated lenders, such as credit unions, which seek to provide a more customer (or member) focussed experience and provide their products at affordable rates and in competition with high-cost alternatives.
Q28: Do you agree with the costs and benefits identified?
We are in broad agreement with the cost-benefit analysis. We would suggest, however, that consideration should be given to the fact that our members are limited in how far they are able to pass through extra costs since – uniquely in the UK – they are capped in the interest that they can charge.
Q29: Do you have any comments regarding our proposed approach to second charge lending?
Q30: Do you agree with our initial assessment of the impacts of our proposals on the protected groups? Are there any others we should consider?
ABCUL – April 2013
The full response is available to download on the right hand side