If a firm has entered into a regulated credit agreement when it did not hold the appropriate permission, the agreement may not be legally enforceable unless we allow it to be. If the firm wishes to enforce the agreement it must first obtain a Validation Order. We explain what Validation Orders are and how to apply for one.
Validation of existing agreements
A Validation Order is a written notice from the FCA where we decide to use our power to allow an otherwise unenforceable agreement to be enforced.
It is required where a firm wishes to enforce a consumer credit agreement which is otherwise unenforceable due to:
- the lender was not authorised by the FCA or licensed by the Office of Fair Trading (OFT) at the relevant time
- the lender was authorised by the FCA but was acting outside the scope of its permission
- the credit broker who arranged the transaction was not authorised by the FCA or licensed by the OFT
We can only grant a Validation Order where we are satisfied that it is 'just and equitable in the circumstances of the case' according to Financial Services and Markets Act 2000.
We took on regulation of consumer credit firms on 1 April 2014. Before this, the Consumer Credit Act 1974 (CCA) enabled firms to apply to the OFT for an order to validate consumer credit (or consumer hire) agreements that were entered into by an unlicensed creditor or owner, or as a result of an introduction made by an unlicensed credit broker.
Agreements entered into before 1 April 2014
For agreements entered into before 1 April 2014, a modified regime applies. The regime is not limited to credit agreements but also includes consumer hire agreements and ancillary service contracts. Under this regime, an agreement may be unenforceable if the credit broker was licensed but not for credit broking.
For agreements that were entered into before this date and which are unenforceable against the borrower, the borrower has no right to recover any money paid or other property transferred under the agreement, or compensation for loss.
If you entered into a consumer credit, consumer hire or ancillary service agreement and you or the credit broker was not licensed by the OFT, then you should consider submitting an application for a Validation Order.
Agreements entered into on or after 1 April 2014
If you entered into a consumer credit agreement on or after 1 April 2014 a different regime applies for the purposes of 'validating' agreements. The regime applies only to regulated credit agreements and not consumer hire or ancillary service contracts.
For agreements that were entered into on or after this date and which are unenforceable against the borrower, the borrower is entitled to recover any money paid or other property transferred under the agreement and compensation for any loss sustained as a result of having parted with it.
If you were not authorised by the FCA, acting outside the scope of your permission or the third party eg the credit broker who made the introduction to you was unauthorised at the time of entering into an agreement and you knew before the agreement was made that the third party had some involvement in the making of the agreement or matters preparatory to its making, then you should consider submitting an application for a Validation Order.
Consider submitting an application for a Validation Order if you:
- were not authorised by the FCA
- acting outside the scope of your permission or the third party, eg the credit broker, who made the introduction to you was unauthorised at the time of entering into an agreement
- knew before the agreement was made that the third party had some involvement in the making of the agreement or matters preparatory to its making
Who can apply for a Validation Order
Only a 'relevant' firm can apply to validate an agreement.
For agreements entered into before 1 April 2014, this means the lender, owner or other person who would be entitled to enforce the agreement.
For agreements entered into on or after 1 April 2014, this means the lender or owner is entitled to enforce the agreement or other person to whom the rights to enforce under the agreement have been assigned.
There are separate application forms depending on whether the agreement is pre- or post- 1 April 2014.
If you have agreements which are unenforceable, some of which were entered into before 1 April 2014, and some on or after that date, both application forms will need to be submitted.
Refer to our guidance notes for more detailed information and whether this may affect you. If you are unsure whether this guidance applies to you, you may wish to seek independent legal advice.
When to apply to a Court directly
There may be circumstances where you may need to apply to a Court rather than to the FCA to allow the agreement to be enforced. For example, where the agreement is a non-credit related agreement or where the agreement is exempt after 1 April 2014, ie consumer hire agreement.
Refer to our guidance notes if you are unsure whether you are required to apply to the court directly. You may also wish to seek independent legal advice.
Our assessment of applications for a validation order
We aim to make a decision within 12 months of receiving your initial application fee.
Factors we take account of when considering your application include:
- Consumer detriment: we will consider whether consumers have suffered any detriment as part of our assessment in determining whether it is just and equitable to make a Validation Order.
- Potential breaches of the CCA: we will consider whether there has been any breaches of the CCA which may have disadvantaged consumers.
- Send us your completed Validation Order application form(s) and appropriate fee.
- Provide your case officer with the information, clarification and/or evidence they require. You may be required to meet with your case officer.
- Assess your application in line with our commitments to you, such as letting you know when a case officer has been assigned and keeping you up to date.
- Check your application against various databases and information held by other regulatory agencies in the UK or overseas.
- Make a decision on granting your application based on the statutory test of whether it would be 'just and equitable' to do so.
The minimum application fee for a Validation Order is £3,500 and this must be paid at the time of submitting your application. For each additional type of agreement you wish to validate we will charge a further £3,500 up to a maximum of £10,000.
If you are submitting both types of application for the same types of agreements only one fee needs to be paid. Refer to our guidance notes for more on fees and type of agreements.
You can make payment with a cheque made payable to the 'Financial Conduct Authority' or debit/credit card.