Out-Law News 4 min. read
03 Oct 2013, 3:02 pm
The Financial Conduct Authority (FCA) said that it was putting lenders "on notice" of tougher rules when it takes over responsibility for the consumer credit sector from April 2014. It has published its draft proposals, which would apply to the over 50,000 firms that currently hold consumer credit licences from the Office of Fair Trading (OFT), for consultation.
"Our aim is to create a regime that protects consumers and allows businesses to operate," said Martin Wheatley, the FCA's chief executive. "There is a balance to be struck here, and to make sure we get it right we want to hear from as many interested parties as possible."
"We believe that payday lending has a place; many people make use of these loans and pay off their debt without a hitch, so we don't want to stop that happening. But this type of credit must only be offered to those that can afford it and payday lenders must not be allowed to drain money from a borrower's account. Today I'm putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome," he said.
However consumer credit expert Ian Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that "reputable" firms that already followed industry codes of practice would have "little to fear" from the proposals.
"The proposed rules are welcome and clarify the level of requirements and obligations which consumer credit firms are likely to be subject to when the new regime comes into force," he said. "Reputable payday lenders should have little to fear from the proposed rules as they are already under an obligation to carry out credit assessment on borrowers and would not normally roll over loans more than three times."
The FCA will take over responsibility of the consumer credit market from the OFT on 1 April 2014. From this date, FCA regulation will apply to any firm or individual offering credit cards or personal loans, selling goods or services on credit, offering goods for hire or providing debt counselling or debt adjusting services to consumers.
The proposals are based on giving consumers enough information to make informed choices, treating those in difficulty fairly and offering loans the meet consumer needs as part of a competitive market. In particular, the FCA would have the power to ban any advertisements or promotions that were misleading or unfair.
In order to be authorised to carry on a consumer credit business, firms and individuals would have to show that they are "fit and proper" and that they have "suitable and sustainable" business models. Affordability checks would have to be carried out before any credit agreement could be entered into, in order to ensure that loans are only given to those that can afford the repayments. The FCA intends to establish dedicated supervision and enforcement teams with the power to carry out detailed investigations and impose tough fines on those who break the rules.
Tougher rules will apply to firms that do "higher risk" business or pose more of a risk to consumers, the FCA said. Among the specific rules proposed for the payday lending sector include limiting the number of times a lender can 'roll over' a loan or demand payment through a CPA to two. Lenders would have to provide information on where to get free debt advice to every borrower that rolls over a loan, while similar information and risk warnings would need to be displayed on all adverts and promotions.
The FCA has also proposed new rules for peer to peer lending platforms, requiring them to provide an explanation of the key features of the loan to borrowers. These lenders would also have to assess the creditworthiness of borrowers, who would also be given a 14 day 'cooling off' period in which to withdraw for the loan. A separate consultation on these issues will follow as part of the FCA's wider proposals for the peer to peer and crowd funding sectors later this month.
Companies providing consumer credit, including payday lenders, must currently obtain a licence from the OFT under the Consumer Credit Act in order to do so. However, many firms have already registered with the FCA for interim permission to carry on business after 1 April 2014, when applications for full authorisation will open. Voluntary industry standards were agreed between trade associations representing 90% of the payday lending market and the Government last year.
However, payday lenders are not fully complying with these standards, according to research published by the Department for Business, Innovation and Skills (BIS). Reporting on its survey of 4,000 individuals, BIS said that nearly a quarter of consumers had been put under pressure to extend loan arrangements, and that the financial arrangements of 60% of those 'rolling over' loans had not been checked by the lender before doing so. There was particularly poor feedback about the use of CPAs, with nearly one in three customers reporting that these arrangements were not clearly explained to them and nearly 60% not told how to cancel.
Financial services regulation expert Monica Gogna of Pinsent Masons said that it was clear from the proposals that the FCA intended to use "intervention and a more hands-on approach" to "fulfil its remit to protect the consumer".
"The FCA's message that the 'clock is ticking' marks a shift towards more detailed rules and regulation in this area," she said.
"Whilst there is a lot of talk of regulation for payday lenders, it is also positive to see there is a more formal recognition for the peer-to-peer industry, which has provided a breath of fresh air in the traditional consumer lending industry," she said.
The FCA plans to finalise its rules in February, ahead of them coming into force from 1 April. It said that as its new approach represented a "once in a generation change in regulation", it did not intend to enforce the new regime before 1 October 2014 provided that lenders could demonstrate that they had acted in line with "existing OFT guidance or other existing legislation".
