HM Treasury & Department for Business Innovation & Skills - Transferring consumer credit regulation to the Financial Conduct Authority
Summary of response
Credit unions are generally not required to be licensed under the Consumer Credit Act since they enjoy an exemption for debtor-creditor agreements under the Consumer Credit (Exempt Agreements) Order 1985 as amended in 2006. This exemption is provided on the basis that credit unions provide consumer credit, uniquely in the UK, under an interest rate ceiling and in competition with higher-cost alternatives. Considerations of proportionality are therefore central to credit unions’ current treatment under the Consumer Credit Act as regulated by the OFT. However, for some consumer credit activity – such as debtor-creditor-supplier agreements or debt advice – credit unions are required to be licensed and, as such, many are.
It is on this basis that we welcome the broad outline of the transfer of responsibility for consumer credit as set out in the consultation. In particular we welcome the proposal to broadly maintain the scope of consumer credit regulation under the FCA regime and to retain pre-existing exemptions. While we would accept that the credit union exemption for debtor-creditor agreements might be something which is reconsidered over the long term, we feel strongly that now would not be the right time to withdraw the concession. The present context of financial regulatory reform and the ever-increasing costs of regulation is impacting upon all financial firms. For credit unions to cope with these reforms and live up to the expansion ambitions the Government has for the sector would be made much more difficult than it ought to be were the consumer credit exemption withdrawn at this time.
Elsewhere, we are particularly pleased that it is proposed that proportionality will be a central principle in the reformed FCA regime for consumer credit. We are very keen that all steps are taken to ensure that smaller firms, such as credit unions, are afforded a flexible and proportionate approach to ensure that inappropriate regulatory burdens do not unduly restrict the supply of credit. This is particularly important in the credit union sector where steps are being taken to expand the role that credit unions can play in providing credit in competition with high-cost alternatives, such as pay day lenders, which have caused so much concern and controversy in recent years.
Similarly, we are happy with the gradual approach that the Government has adopted for these reforms while intervening proactively in the area of high-cost credit and payday lending which is a particular concern to many of our members. The interim period of two years and concurrent review of the consumer credit regime by FCA should help to ensure that a fit-for-purpose regime is established without causing any undue disruption or confusion in the consumer credit market.
Conduct requirements and rules
Q1. What are your views on the Government’s proposal to carry forward CCA conduct requirements which cannot be easily replicated in FCA rules?
Do you agree with the Government’s intention to require the FCA to review these retained CCA provisions, with a view to moving to rules-based alternatives wherever possible?
We are in general agreement with the proposals here. It seems sensible to us to minimise upheaval and ensure that an appropriate regime is established through approaching these reforms gradually and giving the FCA time to consider what powers it ought to take over a number of years.
Given that the review will result in required legislative measures, though, we would suggest that the Government should consult on the FCA's recommendations once its period of review concludes in 2019.
We are also broadly supportive of the general principle that as much of the regime should be instituted under a rules-based system in order to cement a more responsive and flexible approach which can, in future, take action to address emerging trends much more readily than the legislation-based regime has been to this point. It is important within this, though, that the rules-based regime follows a full consultation process and is clearly accountable and transparent.
Q2. How, if at all, do you think industry codes can complement FCA conduct regulation?
We feel that industry codes can play an important role in improving standards and consistency in the market. They can also complement the role of a statutory regulator by driving up standards where a regulatory measure might be considered too heavy-handed. However, we also feel that there are significant limitations to voluntary codes, not least the fact that they do not necessarily apply to all market participants, and that the new regime should be ready to act through regulation where voluntary codes are seen to be failing.
Q3. What are your views on the Government’s proposals for the two tier authorisation regime? Is the scope of the limited permission regime right?
We are supportive of the general approach in instituting a two tier regime which permits those firms for whom consumer credit is ancillary to their primary (non-financial) business a more lenient regime.
We would suggest, though, that certain activities which credit unions currently undertake – such as informal debt advice for members who have become over-indebted – should also be classified in tier two as limited permission activity. Generally this will consist of providing guidance on relieving the burden of unmanageable debt in line with credit unions’ co-operative ethos and social mission but has, by the OFT, been considered high-risk licensable activity.
Q4. What are your views on the proposed changes to the appointed representatives regime?
We have no view.
Q5. What are your views on the proposed approach for dealing with those currently covered by group licences?
We have no view other than to make the point once again that the debt advice work which credit unions often engage in auxiliary to their core business should be considered not-for-profit debt advice and be open to the same treatment as those organisations which perform this service as their primary function. Credit unions only engage in this work informally as part of their social mission and we do not feel it is appropriate that the current categorisation of this as a for-profit, high-risk service is appropriate.
Scope of regulation
Q6. What are your views on the Government’s proposals for scope of regulation, including changes in respect of credit intermediation, tracing agents and credit reference agencies?
We strongly support the Government's proposals for the scope of regulation, particularly retaining pre-existing exemptions such as that enjoyed by credit unions for debtor-creditor agreements. Credit unions enjoy this exemption in recognition both of the fact that they provide credit to their members, uniquely, under an interest rate ceiling and also because of their co-operative, social mission to provide credit on affordable terms in competition with high-cost alternatives.
If the new regime is to meet the proportionality principle which the Government has set for it, the retention of this exemption is vital. While we would accept that in the long term the exemption may not be retained indefinitely, today's context of rising costs of regulation coupled with the ambitious plans for expansion of the sector which the Government is pushing forward elsewhere, necessitate the continued proportionate treatment of credit unions in consumer credit regulation. To withdraw the exemption and add another layer of regulation would seriously hamper credit unions' ability to meet the expectations that are, rightly, being placed upon them.
Q7. Are there any exemptions that are to be carried forward that should be reconsidered?
We have no views about exemptions which should be reconsidered. We do, however, reiterate our support for the retention of the credit union exemption for debtor-creditor agreements which is of great importance to assisting the credit union sector in rising to the ambitious expansion objectives which the Government has given it.
Q8. What are your views on the proposed new activity to capture the activities of peer to peer platforms?
Q9. Do consultation respondents have any data on the activity of lead generators in the debt management sector? What detriment is being cause by these firms? And what are your views on a suitable regulatory response?
Our members have concerns about some of these firms. Lead generation can serve to exacerbate problems of over-indebtedness by pushing vulnerable consumers towards debt which they may not be able to manage. We would suggest that such firms are brought under the regulatory purview and that steps are taken to improve standards in the industry, such as the information that is given to consumers about how their data will be used.
Enforcement and redress
Q10. What are your views on the Government’s proposal to repeal many of the criminal offences in the CCA and make breaches of these requirements, once in rules, subject to the FCA’s enforcement toolkit?
We have no strong views here.
Q11. What are your views on the proposed interim permissions regime?
We are broadly satisfied with the interim permissions regime as proposed. It will be important that special efforts are taken to ensure that the arrangements surrounding the interim period are clear to regulated firms, particularly the dates by which they are required to seek full authorisation.
Q12. If you are operating a peer to peer platform and do not hold an OFT licence, what are your views on the transitional arrangements for peer to peer platforms?
ABCUL – April 2013
The full response is available to download on the right hand side