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FCA should only intervene in debt management sector if voluntary regulation ineffective, Government says

Financial regulators should only create binding rules over commercial debt management companies if the industry cannot improve itself through the use of voluntary codes, the Government has said.20 Jun 2012

Many of the concerns raised by the House of Commons' Business, Innovation and Skills (BIS) Committee in March are due to be addressed by forthcoming changes to the codes of practice used by payday lenders, the Government said in a public response (30-page / 241KB PDF). It added that it was working with the debt management industry to produce a 'Debt Management Plan Protocol' which "will achieve a better and faster result than by option immediately to take a legislative path".

"The Government's strong preference is to promote responsible corporate and consumer behaviour through a voluntary approach," it said. "By working with industry, we can deliver real improvements for consumers far more quickly than waiting for legislation."

The Committee had urged the Government to take "swift and decisive action" over "opaque and poorly regulated" commercial debt management services, including the 'payday lenders' operating on many high streets, in a report in March. It also asked the Government to clarify if and how regulation of the industry will transfer from the Office of Fair Trading (OFT) to the new Financial Conduct Authority (FCA) when it is established next year.

The four main trade associations, representing 90% of the payday loan market, have committed to include enhanced consumer protections within their codes of practice, the Government said. These will include a common set of guidelines indicating what customers should expect from a lender, increased transparency about repayments and the ability to cancel any continuous payment authority arrangements. In addition, lenders will only be able to 'rollover' or extend the terms of a loan at the specific request of a customer and after reminding the customer of the risks of extending a short-term loan.

The draft Financial Services Bill, which will dismantle current regulator the Financial Services Authority (FSA) and hand most of the day-today regulation of banks and insurers to the Bank of England, contains a power to transfer regulation of the consumer credit industry from the OFT to the FCA. The Government intends to proceed with this transfer "provided that a proportionate model of FCA regulation can be designed", it said, and will consult on this model in early 2013. It plans to make an announcement on whether the FCA will be given the power to suspend consumer credit licenses "before the summer recess".

"[The proposed transfer] is a complex piece of work, which we must take the time to get right," the Government said in its response. "We have convened a form of key industry and consumer stakeholders to advise on the design process. The Government will carefully examine the costs and benefits of the new regulatory model. The Government's decision will be based on the evidence of these costs and benefits and a full assessment of the regulatory impact of the proposed model."

The Consumer Credit Act (CCA) requires most businesses that lend money to consumers or offer goods or services on credit to be licensed by the OFT. The Government said that it would have to consider the level of risk and costs posed to consumers and businesses by the "diversity" of regulated activities, and consider what regulatory approach is appropriate for these different segments of the market.

However, it said that the FCA will be able to "apply a much greater level of scrutiny" to credit licence applications and will have the ability to ban or impose restrictions on products it considers harmful. It will also have the flexibility to set fees which reflect the type of activity a firm undertakes and the scale of that activity.

The OFT began its own review of compliance in the payday lending sector in February and has completed more than half of its planned inspections, the Government said. It is due to publish its findings and recommendations for improving standards across the sector by the end of the year, and has stated that it could revoke the credit licences of firms that break the law or fall foul of industry codes of practice.