We summarise responses to QCP 19/27 on the recognition of the Lending Standards Board’s (LSB) Standards of Lending Practice for business customers. We also outline our next steps.
The recognition process
We want to support and encourage the development and use of best practice industry codes of conduct. So we created a process to allow us to formally recognise industry codes covering certain unregulated activities. Where firms’ behaviour is in line with an FCA recognised industry code, this will tend to indicate the firm is complying with applicable FCA rules on ‘proper standards of market conduct’ when they undertake unregulated activities. However, firms may also be able to meet proper standards of market conduct in other ways.
How we consulted
In September 2019, we published our September Quarterly Consultation No 25 CP19/27. We asked for views on whether or not we should recognise the LSB’s Standards of Lending Practice for business customers.
Feedback summary and our response
We received 1 response from a consumer body to the code recognition section in CP19/27.
They argued that we should not recognise the LSB’s Standards of Lending Practice for business customers for 2 reasons.
Risk of misleading customers
First, the respondent disagreed with our overall policy approach to recognising industry codes for unregulated activities. They felt that recognising the LSB’s Standards of Lending Practice for business customers could potentially mislead SMEs who could assume they are protected by a code we have recognised but the activity itself is unregulated. The respondent felt this would be particularly problematic when the FCA is looking to reduce confusion around the perimeter of what we do and don’t regulate.
We considered this issue more widely as part of the work on our overall code recognition policy (PS18/18). That policy has been decided and our role now is to consider whether, on a case-by-case basis, codes meet our criteria.
Lack of transparency
Second, the respondent said there was a lack of transparency about how the LSB monitored and enforced the Standards. The respondent argued there could be no accountability without transparency about the performance of individual firms. If we were to recognise the LSB’s Standards of Lending Practice for business customers, the respondent wanted us to get an undertaking from the LSB about how it will address this point.
In considering this issue, monitoring and enforcement are not among our criteria for recognising codes. We believe it would be disproportionate to require the LSB to improve firm-level transparency here when our criteria do not require it and it would be inconsistent with our approach to recognition of other codes where we have not made this requirement. In any case, the LSB provides independent oversight of its registered firms’ adherence to the Standards of Lending Practice for business customers.
Having taken into consideration the consultation response and process we have decided to recognise the LSB’s Standards of Lending Practice for business customers for unregulated activities. As the LSB’s Standards of Lending Practice for business customers covers both regulated and unregulated activities, our recognition only extends to unregulated activities.
Update: 5 August 2020
As a result of the Covid-19 pandemic and Government support measures for business customers, the LSB has made changes to the standards. The changes consider the impact of those support measures (Bounce Back Loans Scheme and the Coronavirus Business Interruption Loan Scheme). We have agreed to maintain our recognition of these standards and the changes that have been made.
We will recognise the LSB’s Standards of Lending Practice for business customers for 3 years. After this time, we can extend our recognition if we think the content of these Standards is still relevant and appropriate. Our recognition of these Standards is as it stands at the current date. If we think that they no longer represent proper standards of market conduct, we will withdraw recognition before the end of the 3-year period. The LSB’s separate Information for Practitioners for business customers is not included in our recognition.
Existing rules will continue to apply
Firms following the code will still need to comply with any restrictions that apply on financial promotions in the Financial Services and Markets Act 2000 or rules in CONC 3 (Financial promotions and communications with customers), which may apply to some unregulated activities. The Standards of Lending Practice for business customers expressly acknowledge that where legislation or statutory rules replicate or conflict with the Standards, the legislation or statutory rules supersede them.
By conducting themselves in line with the applicable Standards of Lending Practice for business customers, individuals and firms will tend to indicate they are meeting their obligation to meet proper standards of market conduct for unregulated activities.
We do not intend to supervise firms or individuals directly against the Standards of Lending Practice for business customers in unregulated markets. Our role is to make sure that firms meet their governance, and systems and control obligations, including under the SM&CR. We expect firms and individuals to consider both the spirit and letter of the Standards of Lending Practice for business customers to make sure they fully meet any obligations to observe ‘proper standards of market conduct’ for unregulated activities. Compliance with the Standards may be one way to show evidence they are complying with our overall governance requirements.
We will not take action based solely on a breach of provisions in market codes, recognised or not. However, codes may however be used as evidence and relied upon in determining what proper standards are, or were believed to be, at the relevant time. Recognition of a market code does not change our enforcement approach. It is not a new basis for enforcement, and does not strengthen our ability to take enforcement action.