From 1 April 2014, we took over the regulation of the consumer credit industry from the Office of Fair Trading (OFT). Where the OFT required credit unions to be licensed to carry on regulated consumer credit activities, we require credit unions to be authorised instead.
The implications for credit unions
Most credit unions lend money direct to borrowers where the interest rate charged does not exceed the statutory cap. This type of lending is exempt and is not a regulated consumer credit activity.
For credit unions in Great Britain, the statutory cap is 3% per month. For credit unions in Northern Ireland the statutory cap is 1% per month, (the Northern Ireland Department of Enterprise, Trade and Investment has consulted on whether to increase this). Any form of lending above these statutory caps is prohibited.
The extent to which a credit union can participate in other regulated consumer credit activities (including non-exempt lending) is limited. But, if you undertake any regulated consumer credit activity,you need to have the appropriate regulatory permission to be able to carry on those activities lawfully.
The consumer credit activities a credit union may engage in are constrained by:
- the relevant legislation
- the rules of your credit union
- credit unions' new sourcebook (CREDS)
Credit unions only need to apply to us for a separate regulatory permission if they carry out consumer credit activities that are regulated.
Regulated consumer credit activities for credit unions
Regulated (non-exempt) lending
Some credit unions enter into other types of loan agreement that may not be exempt. The scope of the relevant legislative provisions is unchanged from the OFT regime. In particular, a loan to finance a transaction between the borrower and a third-party supplier is subject to regulation only where this is under pre-existing arrangements, or in contemplation of future arrangements, between the credit union and the supplier.
Credit unions may therefore be able to write a cheque on behalf of a member to a third party as long as the only agreement is between the member and the credit union and there are no arrangements between the credit union and the third party (and no expectation of future arrangements).
Other types of regulated consumer credit activity
A credit union will also need to have the relevant permission if it carries on any other types of regulated consumer credit activity.
This might include, for example:
This includes helping a borrower with their debt problems by taking over their obligation to discharge a debt in return for payments; or negotiating on their behalf with a creditor.
Whether an arrangement with a borrower amounts to a promise by the credit union to perform a borrower’s obligations under a loan agreement will need to be determined on a case by case basis.
It is unlikely that a credit union will be debt adjusting simply because it makes a loan to a member for the purpose of refinancing the member’s existing debts and pays the loan advance directly to the member’s creditors to pay off those debts.
Giving advice to a borrower about debts due under any credit agreement or consumer hire agreement. It is important to note that debt-adjusting and debt-counselling are only regulated when the activity is carried out in respect of credit agreements or consumer hire agreements that a borrower has entered into with other lenders. Therefore, a credit union does not need to have permission for the activities of debt adjusting or debt-counselling if the credit union is the lender under the agreement concerned.
Credit information services
Obtaining information on behalf of a borrower about their financial standing (for example, by asking a credit reference agency) or seeking to have such information altered or corrected, or advising a borrower on how they can obtain such information themselves and/or seek to have it amended. Obtaining a credit reference report as a part of the credit union’s assessment of the creditworthiness of a borrower would not in itself constitute providing credit information services.
'By way of business'
Consumer credit activities are only regulated if they are carried on ‘by way of business’.
Whether this test is met will depend on the facts of each case. A credit union might not be carrying on an activity ‘by way of business’ if it only carries on the activity:
- on an occasional basis
- without payment
- not in connection with other regulated consumer credit activity
Read more about the ‘by way of business’ test in PERG 2.3.
If a credit union does undertake any regulated consumer credit activity, it needs to have the appropriate regulatory permission to be able to carry on those activities lawfully.
Before applying for consumer credit permission, credit unions should review whether or not the activities they undertake will be regulated consumer credit activities.