Firms with consumer credit authorisation may still benefit from 'connected contracts' exclusion, says FCA

The regulator has updated a frequently asked questions page on consumer credit regulation in response to queries from businesses currently operating under an interim permission to carry out their consumer credit activities. Businesses are concerned that as they become authorised by the FCA to carry out their consumer credit activities, they will no longer be able to take advantage of a statutory exclusion from the regulatory regime for certain insurance mediation activities.

However insurance law expert Iain Sawers of Pinsent Masons, the law firm behind Out-Law.com, said that the wording used by the FCA still leaves businesses with uncertainty on this point.

"The guidance clarifies the position while the transitional arrangements are in place but there is still a degree of uncertainty surrounding how the 'connected contracts' exclusion will apply to firms once they become authorised under the FCA's new credit regime from April 2016 or before," he said. 

"This will require firms to consider whether the consumer credit activity is a main focus of their business and whether it is carried on in a way that is incidental and complementary to that main business," said Sawers. "If most or a significant proportion of the goods or services are financed by credit, arranged by the firm, the FCA's view is that these consumer credit activities are unlikely to be ‘incidental’."

The FCA took over responsibility for the consumer credit regime from the now-defunct OFT in April 2014, backed with stronger powers to clamp down on poor practice. Transitional rules run until April 2016 for firms that had previously been licensed by the OFT to provide consumer credit services, allowing them to operate under an interim permission.

The connected contracts exclusion allows companies that supply non-motor goods and certain travel services to "offer, arrange or advise" on insurance contracts related to those supplies or to assist in the administration or performance of those contracts without being subject to regulation. The exclusion is only available to firms if their main line of business does not otherwise consist of carrying on a regulated activity.

The transition from the OFT licensing regime to the FCA's consumer credit regime therefore created some difficulties for some businesses - for example, retailers that give customers the opportunity to pay for goods in instalments but that can also arrange insurance policies covering repairs or replacements of those goods. Legislation expressly provided for the exclusion to remain available for as long as firms only have interim permission to carry out consumer credit activities, but is silent on what will happen once transition to the new regime is complete (although the accompanying Explanatory Memorandum suggests Government intended for the exclusion to cease being available).

On its frequently asked questions webpage, the FCA confirmed that the exclusion "can apply while a firm has interim permission but may cease to apply following it becoming fully authorised".

"Once fully authorised, in FCA's view firms can rely on the connected contracts exclusion only if their regulated consumer credit activity is not the main focus of the business and is carried on in a way that is incidental and complementary to their main business," it said.

"For example, a retailer's main business may be selling goods or non-financial services, but if most or a significant proportion of these are financed by credit, arranged by the firm, the regulated activities are unlikely to be 'incidental' to the firm's business," it said.

An individual employed by a firm no longer able to take advantage of the exclusion, but with only limited permission to carry on one of the relevant credit activities, could potentially become an "appointed representative" of a fully-authorised insurance firm, the FCA said.