The Financial Conduct Authority (FCA) today set out its vision for the regulation of consumer credit when it takes over from the Office of Fair Trading (OFT) on 1 April 2014.
The proposed regime will allow the FCA to provide stronger protection and better outcomes for consumers than the existing OFT regime. There will also be tougher requirements for payday lenders, including a mandatory affordability check on borrowers, limiting the number of loan roll-overs to two, and restricting (to two) the number of times a continuous payment authority (CPA) can be used. There will also be tighter restrictions on what payday lenders can say in adverts, while the FCA will be able to ban any that are misleading.
FCA regulation will apply to any firm or individual offering credit cards and personal loans, selling goods or services on credit, offering goods for hire, or providing debt counselling or debt adjusting services to consumers.
Martin Wheatley, the FCA’s chief executive, said of the new regime:
“Our aim is to create a regime that protects consumers and allows businesses to operate. 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.”
Commenting specifically on payday lenders, Martin Wheatley said:
“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. That is why we’re imposing tighter affordability checks, and limiting the use of rollovers and continuous payment authorities.
“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. The clock is ticking.”
The change in regulation will see the FCA take on responsibility for more than 50,000 firms who have existing credit licences. The consultation is open until 3 December 2013 and the FCA will publish its final rules and guidance in February 2014.
The FCA wants to ensure that consumers are given enough information to make informed choices, that the market is competitive and offers loans that meet customer needs, and that those in difficulty are treated fairly. The key elements of the proposed consumer credit regime are:
- Affordability checks for every credit agreement to ensure that only consumers that can afford a loan can get a loan.
- All advertisements and other promotions must be clear, fair and not misleading. The FCA will be able to ban misleading adverts.
- Firms that do higher risk business and pose a greater risk to consumers will face a tougher supervisory approach. Specific rules for the payday sector have been proposed and include:
- Limiting loan rollovers to two;
- Limiting the number of attempts by a payday lender to use CPAs to pay off a loan, to two;
- Information on where to get free debt advice will be given to every borrower that rolls over a loan; and
- Clear risk warnings to be displayed on all adverts and promotions along with more information about debt advice.
- Consumers will continue to have access to the Financial Ombudsman Service, but there are currently no plans to include consumer credit in the scope of the Financial Services Compensation Scheme. The FCA will keep this under review.
- A robust authorisation gateway to ensure that any firm or individual authorised to do consumer credit business is fit and proper, and that firms have suitable and sustainable business models.
- Dedicated supervision and enforcement teams will crack down on poor practice, money laundering and unauthorised business. Firms that break the rules may face detailed investigations and tough fines.
Peer to peer lending platforms must give borrowers explanations of the key features of the loan - including the key risks - before an agreement is made, and assess the creditworthiness of borrowers before granting them credit. A 14 day cooling off period will allow the borrower to withdraw if they have a change of heart.
The FCA is already considering how competition is operating in these markets in the interest of consumers and will launch market studies as appropriate to explore this further. The FCA will also take into account the findings of the Competition Commission’s study on payday lending when they are published.
The FCA is inviting all interested parties to provide feedback to the consultation so the final measures strike the right balance between consumer protection and allowing businesses to function.
A new rulebook, the Consumer Credit Sourcebook, will contain the new rules and guidance of the FCA’s regime. Included will be existing OFT standards that the FCA will carry across, turn into FCA rules and guidance, and be able to enforce upon.
The FCA recognises that this is a once in a generation change in regulation and therefore not all the new requirements will come into effect immediately.
In the meantime the FCA will keep listening and learning. As soon as the FCA gets its powers it will begin collecting information and adjust its approach as our experience in the sector grows.
Notes to Editors
- The FCA’s consultation paper: CP13/10 - Detailed proposals for the FCA regime for consumer credit
- A separate consultation on crowd funding, including the lending/investing aspects of peer-to-peer lending, will be published later in October.
- The timetable (subject to change) for future FCA papers and announcements is:
|Consultation paper on fees, including authorisation fees for consumer credit firms and how we propose to calculate periodic fees
|Consultation paper on our approach to regulated crowd funding, including the lending/investment aspects of peer-to-peer lending
|Consultation on plain language guidance on the new consumer credit regime for firms and other stakeholders
|Consultation paper on some further consequential changes to the Handbook
|Announcement of dates (starting in autumn 2014) by when specific types of firms with interim permissions must apply for full authorisation
|Policy statement in response to this consultation, including final rules for the new regime
|Feedback on responses to the consultation paper on our approach to regulated crowd funding, including the lending/investment aspects of peer-to-peer lending
|Final version of plain language guidance on the new consumer credit regime for firms and other stakeholders
|Fees: proposals for periodic fee rates for 2014/15
|Around the time of transfer (April 2014)
|FCA paper on key risks in the market and our priorities for intervention
- Many consumer credit firms are already registering with the FCA for an interim permission that will allow them to continue to carry on business after 1 April 2014. A 30% discount is available to firms that register before the end of November. From 1 April, applications for full authorisation can be made and the FCA will aim to determine a full and accurate application within six months of receipt of a complete application. Firms without an interim permission cannot carry on credit activities until an application for full authorisation is approved. So far around 9,000 firms have registered for an interim permission. More information about interim permissions.
- On the 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA, as well as how it is different to the PRA.