Consumer credit is an essential and significant market in the UK. In 2011-12 UK consumers borrowed £176bn from credit card companies, businesses offering hire-purchase agreements and payday lenders.
In March 2013 the UK Treasury announced that it would transfer responsibility for consumer credit regulation from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA).
What does this mean for lenders and borrowers?
FCA Regulation of Consumer Credit
This move will provide a more consistent approach to consumer protection while ensuring competition in the market, as consumer credit and other retail financial services functions will now be regulated by the same organisation – the FCA.
From April 2014 onwards the FCA will be granted robust powers to tackle potential or emerging problems in the consumer credit market swiftly and effectively.
In designing the new regulatory regime, the government has endeavoured to strike a balance between safeguarding consumers’ interests fairly and applying a proportionate burden on firms.
From Autumn 2013 consumer credit licensees, registered with the OFT, that wish to continue consumer credit activities will be able to register with the FCA for an “interim permission” and after the FCA formally begins regulation of such activities in April 2014, firms can start to apply for full authorisation in mid-2014.
The Old Consumer Credit Regulation Regime
The existing OFT 2010 regulatory regime – as outlined in the Consumer Credit Act 1974 - applies to unsecured credit including but not limited to loans, hire-purchase agreements, credit cards and overdrafts. It may also apply to some forms of secured credit.
The Act regulates the way in which consumer credit licensees carry out business with consumers with specific rules on advertising of credit agreements, pre-contractual disclosure, early settlement of debts, the form and substance of credit agreements and post-contractual provisions.
The regulations require certain information – such as the nature and duration of the agreement, the parties, rates and repayments and any rights of withdrawal - to be set out in the credit agreement. Moreover this information must be presented clearly and concisely and must be easily legible.
The document the borrower signs as part of the agreement must also contain the date of signing and the date at which the agreement will be executed in the case of cancellable agreements.
Changes with FCA Regulation
The FCA’s consumer credit regulatory regime will remain broadly the same as its predecessor, however it does specifically provide for tougher rules on payday lenders.
The new requirements impose on lenders mandatory affordability checks on borrowers while limiting the number of loan roll-overs to two.
There will also be tighter regulation on the information payday lenders can present in advertisements, with the FCA being granted the power to ban any such adverts that are deemed misleading to borrowers.
If your business is affected by the changes or you are considering offering consumer credit, contact James Crighton (jcrighton@rollingsons.co.uk) or telephone 0207 611 4848 today for specialist advice.
