The Financial Conduct Authority (FCA) yesterday 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 it will allow firms some time to fully implement the new requirements. Although the new rules come into effect in April 2014, the FCA will not enforce rule breaches before 1 October 2014 providing firms can show that they have acted in line with existing OFT guidance or other existing legislation.
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.