Firms’ consumer credit activities can no longer be incidental
If your firm continues to permit payments by instalments, it needs to make changes now or risk acting unlawfully, says Susanna Heley
Consumer credit is a complex subject. There are any number of traps for the unwary. In the past, solicitors have fortunately not had to worry too much about undertaking consumer credit activities, as the Law Society has held a group licence covering all solicitors’ firms. That is all going to change.
As of 1 April 2014, the Financial Conduct Authority (FCA) is taking over the regulation of consumer credit activities from the Office of Fair Trading (OFT). The FCA has already announced that it is not continuing the group licence regime. The FCA is instead extending the exempt professional firm regime to apply to consumer credit activities. However, it is not nearly so neat a fit as the existing regime which relates broadly to regulated financial services. Firms should be familiar with the regime, which allows firms to conduct regulated financial services if they are incidental to the professional services provided and other conditions are met under section 327 Financial Services and Markets Act (FSMA) 2000.
The problem with consumer credit activities is the extent to which they are "incidental" within the meaning of FSMA, which is a question, we are told, for the FCA to decide. The Solicitors Regulation Authority is not in a position to give guidance until the FCA confirms its view. In the interim, solicitors firms should consider whether the consumer credit work they do requires them to obtain an individual licence.
I will go out on a limb and say that I suspect that most law firms engage in consumer credit activity in one guise or another. According to the Consumer Credit Act 1974 (CCA), a licence is needed to carry on a consumer credit business or an ancillary credit business.
It’s unlikely that law firms are directly carrying on a consumer credit business. However, a consumer credit agreement for the purposes of the CCA is widely defined as an agreement between an individual and any other person by which the creditor provides credit of any amount. ‘Credit’ is defined as a loan or any other form of financial accommodation.
There are exceptions and savings for high net worth individuals and those taking credit in the course of a business as well as credit agreements worth more than £25,000, but firms may want to consider whether there is a chance that fee arrangements with individual clients are caught by the definitions. If so, are those fee arrangements permitted under the exempt professional firm regime?
It is more likely that firms will fall foul of the "ancillary credit business" provisions found in section 145 of the CCA. Of particular interest are subsections 7 and 7a which deal with debt collecting and debt administration. These provisions relate only to such activities arising out of a consumer credit agreement and there are savings relating to solicitors engaging in contentious business as defined in section 87 Solicitors Act 1974. Contentious business is defined as business done in or for the purposes of proceedings before a court or before an arbitrator. A number of challenging questions arise out of that definition.
Those firms with a debt collection practice servicing consumer credit act agreements will need to carry out a thorough and careful risk assessment. It is unlikely that instructions to pursue a consumer credit act debt will fall within the exempt professional firm regime which means that firms undertaking such work are likely to need an FCA licence.
The FCA are not accepting prospective applications for licences. Transitional arrangements are in place but they only apply to those firms already licensed by the OFT. The Law Society’s group licence is set to expire on 31 March 2014. Those firms who consider that they need to be licensed will need to take steps now to ensure that they are not acting unlawfully on 1 April 2014.
One final thought for Christmas – just in case your head is not already hurting – if your firm does need an individual licence, you will need to consider whether it is appropriate to make changes to your complaints procedures as complaints arising out of regulated consumer credit activities may need to be directed to the Financial Ombudsman Service after 1 April, in place of LeO.
This article was first published by Solicitors Journal and is reproduced by kind permission.
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.