All change for consumer credit guidance?

What could a new Financial Conduct Authority (FCA) consultation on amendments to its consumer credit regime mean in practice? Harriet Milburn of Addleshaw Goddard LLP examines the detail of the proposals.

Original news

FCA proposes consumer guidance changes, LNB News 24/02/2015 79

Proposals on changes to consumer guidance on credit broking, guarantor lending, high-cost short-term credit, financial promotions, arrears, default and collection and mortgages are set out in a consultation from the FCA. The changes aim to address potential areas of harm to consumers. Other changes include clarifications and amendments to ensure the FCA’s rules clearly reflect its policy intention, and issues raised by firms and other stakeholders. Comments are requested by 6 May 2015.

What are the FCA’s proposals in this consultation?

The FCA proposes changes to the rules and guidance in CONC (and some other chapters of the handbook), ranging from minor clarificatory updates to more significant amendments that will require widespread process or documentation changes. The main areas of change fall into four categories: lending (including new requirements for firms to provide pre-contract information to and to assess the creditworthiness of guarantors under the relatively new concept of ‘guarantor loans’), financial promotions (including the removal of the exemption from the high-cost short-term credit risk warning and amendments to rules around prominence), debt management and arrears (allowing firms to introduce a continuous payment authority when exercising forbearance without the requirement for a regulated modifying agreement) and changes made necessary by the upcoming implementation of the Mortgage Credit Directive 2014/17/EU. The FCA also uses the consultation to seek views on whether to retain or amend the new rules in relation to credit broking that were introduced in January 2015 through PS14/18.

What is the purpose of the proposals?

The purpose of the proposals is to address concerns and queries that have arisen since the transfer of credit regulation from the Office of Fair Trading to the FCA in April last year. Following nearly one year of regulating of the credit market, the FCA have now had the opportunity to see the new CONC rules ‘in action’ and have considered whether they still complement current practice and appropriately reflect policy intentions. The consultation also addresses issues raised by firms, trade bodies, and consumer groups within that period. It has been nearly four months since the new credit broking rules were released (without a consultation process) so the FCA is now seeking views on the practicality of the rules and publishing a cost and benefit analysis, although it is clear that the FCA’s intention is to retain them. Finally, the Mortgage Credit Directive is to be fully implemented by 2016 and as second charge mortgages will then be regulated by the ‘first charge mortgage’ regime the purpose of the relevant chapter of the consultation is to address consequential changes to CONC.

How do the proposals fit with the FCA’s objectives?

When consulting on new rules, the FCA is required to explain why the proposed rules are consistent with its strategic objective and advances one or more of its regulatory objectives. Its reasoning in relation to CP15/6 is set out in Annex 3. As well as considering that the proposals are compatible with the strategic objective of ensuring that the market functions well, the FCA believes that the proposals advance the operational objectives of promoting market integrity and securing an appropriate degree of consumer protection. Its reasoning places significant emphasis on the latter, explaining that the rules are designed to aid customer transparency and protection from detriment. For example, the new proposals for guarantors ensure that customers receive timely information and the financial promotions proposals are intended to increase customer cost transparency without being overly burdensome for firms. The FCA also specifically addresses that the removal of the high-cost short-term risk warning exemption (previously available when there were space restrictions) is unlikely to inhibit brand recognition for new entrants and is therefore not contrary to the competition objective.

What action has been taken to date?

When the FCA took over regulation of consumer credit in April 2014, 50,000 new firms fell within its remit. In preparation for that change the FCA consulted on the new CONC rules from October 2013 and published them in February 2014, leaving a fairly short window for implementation, although the rules were intended to, in most areas, have substantially the same effect as the previous Consumer Credit Act regime. Since then, there have then been small amendments to CONC finalised in a handbook notice in September 2014, new rules on the high-cost short-term lending cap in January 2015 and the publication of the new credit broking information and promotional requirements in December 2014 (the subject of one chapter of CP15/6). The FCA acknowledges in the consultation that it is finding it necessary to propose more changes to the requirements than it would for a sector that it has regulated for a longer period. The Mortgage Credit Directive consultation has largely been dealt with separately from the transfer of credit as it deals with a sector that has, for some time, fallen within the FCA’s remit. The changes proposed in CP15/6 deal only with the residual changes to CONC as a result of second change lending moving to the ‘first charge’ regime.

Specifically, how does the FCA plan to change the consumer credit financial promotion regime?

The FCA proposes to change the prominence requirements in order that representative examples and representative APRs must be only of ‘no less prominence’ than the cost of credit and incentive/comparative triggers. This represents a shift from the current requirement for the information to be ‘more prominent’ and has the ability to affect the design of many credit related financial promotions, including brochures, web pages and television and radio adverts. The requirement for the representative example or APR to be ‘more prominent’ than the trigger has been the subject of several upheld adjudications by the Advertising Standards Authority. It is still likely, however, that firms will continue to grapple with the subjective arguments around what makes a piece of information ‘prominent’, albeit that the threshold may be lowered. A further fairly significant change is the removal of the exemption from including the high-cost short-term credit risk warning (currently available where it is not reasonably practicable to include it due to space restrictions). The FCA also proposes to make the clear, fair and not misleading guidance a rule to clarify expectations on compliance, clarify the guidance on when the inclusion of a representative APR is triggered and clarify that ‘interest-free credit’ amounts to a cost of credit trigger and therefore requires a representative example (this may have a widespread effect for firms that have taken a view on this ‘grey area’ in the past).

What are the next steps?

The FCA has invited responses to the specific proposals and the more general issues raised in the credit broking chapter of the consultation by Wednesday 6 May. It then aims to publish a policy statement with final rules and guidance in summer 2015. It is intended that the final rules will come into effect one month later, although the proposals around the use of a continuous payment authority when in arrears, not for profit debt advice bodies, complaints procedures and debt advice in a durable medium will come into effect immediately. A further consultation is also expected later this year regarding changes to the high-cost short-term credit regime following the Competition and Markets Authority’s payday lending investigation, improving responsible lending standards, potential rules and guidance on repeat borrowing in the high-cost short-term lending market, a potential ban or restriction on cold calling, promoting the use of a quotation searches and any further credit broking proposals following responses to CP15/6.

How should lawyers and their clients prepare for the proposed changes?

Given the relatively short lead in time once the final rules are published, lawyers and clients should be thinking now about which changes would affect products of interest to them and any process builds or documentation changes that may be necessary. Firms should also be mindful of the more minor changes proposed, such as where the FCA intends to change the status of a CONC provision from guidance to a rule, as any risk based decisions made on the basis of the previous guidance status may now need to be re-visited depending on risk appetite. It is likely that mortgage lending firms are already entrenched in a wider process for the implementation of the Mortgage Credit Directive, but the CONC proposals should also be fed into that analysis.

Interviewed by Anne Bruce.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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