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What rights do the Financial Conduct Authority (FCA) now have to intervene in consumer credit related insolvencies?
Policy Statement: PS14/3—Final rules for consumer credit firms, LNB News 28/02/2014 65
Detailed rules for consumer credit firms have been issued by the FCA, which takes over the regulation of around 50,000 consumer credit firms from the Office of Fair Trading (OFT) on 1 April 2014. The final rules carry across many standards from the Consumer Credit Act 1974 (CCA 1974) and the OFT guidance, and contain higher standards for payday and other high-cost short-term lenders and for debt management firms.
When are the powers effective?
On 1 April 2014, the FCA took over the regulation of around 50,000 consumer credit firms from the OFT. This means all firms that carry on regulated consumer credit activities are brought into the FCA's regulatory regime, including their authorisation, supervision and enforcement processes.
Any companies/partnerships wanting to continue carrying on consumer credit activity covered by their OFT licence after 1 April 2014 must have obtained an interim permission from the FCA.
Which firms are affected?
Firms (including individuals) carrying on regulated financial services activities in the UK must be authorised by the FCA unless they qualify for an exemption or an exclusion.
An authorised firm will be granted either full or limited permission depending on the activity it undertakes.
Examples of limited permission consumer credit activities include:
• consumer credit lending (where the main business is selling goods or non-financial services and there is no interest or charges)—this excludes hire-purchase and conditional sale
• consumer hire
• credit broking (where the main business is selling goods or non-financial services and broking is a secondary activity)
• credit broking in relation to the Green Deal
• not-for-profit debt counselling and debt adjusting
• not-for-profit credit information services
• local authorities (lending within the scope of the Consumer Credit Directive 2008/48/EC)
Examples of higher-risk consumer credit activities include:
• consumer credit lending (including personal loans, credit card lending, overdrafts, pawnbroking, hire-purchase, conditional sale, etc)
• credit broking (including introducing consumers to lenders as a main business activity)
• debt adjusting
• debt counselling
• debt collection
• debt administration
• credit information services
• credit reference agency services
• peer-to-peer lending
What powers of intervention does the FCA have?
The FCA has the usual powers of intervention in relation to company voluntary agreements and individual voluntary arrangements of authorised persons (as defined in the Financial Services and Markets Act 2000, s 31 (FSMA 2000)), and administrations, liquidations and receiverships of authorised persons, appointed representatives (as defined in FSMA 2000, s 39(2)) and those carrying on regulated activities contrary to a general prohibition (ie those who are not authorised, but ought to have been) as set out in FSMA 2000, ss 355–374. Broadly the powers are:
• the entitlement to be heard on an application and apply to court
• the entitlement to any notice/other document sent to creditors/the company
• the right to attend any creditors' meeting or committee meeting and make representations
What are the practical implications?
The FCA will have stronger powers and more resources than the OFT to regulate the consumer credit industry. The FCA's supervisory approach is risk-based and proactive to allow them to identify consumer harm quickly and in theory intervene to ensure consumers are protected. It remains to be seen how much the FCA will exercise these new rights over consumer credit insolvencies in practice, but insolvency practitioners (IPs) who are considering an appointment over a consumer credit firm (and lawyers advising those IPs) should be aware that the FCA may intervene.
The FCA's written consent is required before appointing an administrator, although failure to notify the regulator in advance may not invalidate the appointment (see Re Ceart Risk Services Ltd where failure to notify the Financial Services Authority (the predecessor to the FCA) was not fatal). This means that IPs who are considering an appointment over a consumer credit firm need to bear this in mind when preparing the timetable for insolvency proceedings to make sure the FCA are duly notified in advance.
Officeholders (eg administrator, liquidator, receiver, trustee in bankruptcy) are also under additional duties to report to the FCA without delay any company or partnership which he thinks is carrying on a regulated activity in contravention of the general prohibition (FSMA 2000, s 19) or a credit regulated activity (FSMA 2000, s 20). This means that IPs who are appointed over a consumer credit firm need to bear this extra duty in mind following their appointment.
To date, IPs have been focusing on whether they are personally carved out of the new licensing requirements for consumer credit matters—the work of a licensed insolvency practitioner, conducting or advising upon insolvency appointments, will not generally require FCA-authorisation. However, they should also bear in mind these additional changes relating to the FCA's rights to prior notice of proceedings, rights to intervene and rights to be notified of certain conduct for appointments over consumer credit firms.
If you are a LexisPSL Subscriber, click the link below for further information:
Practice Note: Financial services firms and insolvency (Subscriber access only)
News Analysis: 'Dear IP' delivers good news for insolvency practitioners (Subscriber access only)
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