Consumer credit activities regulation: SRA plans

For more than a year we have voiced concerns about consumer credit work, the changes in the way it is regulated, and the potential impact those changes will have on both yourselves and consumers.

We believe it is a serious issue that could have serious consequences for many of you.

To recap, on 1 April 2014, responsibility for the regulation of consumer credit activities transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA). The Financial Services and Markets Act 2000 (FSMA) replaced the provisions of the Consumer Credit Act 1974 (CCA 1974) that covered licensing and other aspects of the regulatory framework for consumer credit regulation.

Consumer credit work is wide-ranging and can be an integral part of many areas of your work. This isn’t just about those 1,000 or more firms involved in debt recovery work.

For example, if you are involved in family matters and are discussing with a client in a divorce case their finances, you could be classed as carrying out consumer credit work if you negotiate terms with creditors on behalf of the client for settlement of a joint debt. That could also be the case if you are advising on the acquisition of a property or land and you seek to amend information held by a credit information agency about your client’s financial standing.

We therefore believe that this transfer of regulation affects the majority of solicitor firms.

What’s changed?

Until the transfer of regulation from the OFT to the FCA, Solicitors Regulation Authority-authorised firms carried on consumer credit activities under an OFT group consumer credit licence which was held by the Law Society. Since 1 April, firms have been able to undertake consumer credit work under transitional arrangements put in place by the FCA with appropriate changes made to the SRA Financial Services (Scope) Rules 2011.

These transitional arrangements were originally meant to last six months, however we negotiated an extension to 31 March, 2015.

Under Part 20 of FSMA, the carrying on of FSMA-regulated activities by members of a designated professional body (DPB), such as the SRA, are exempt from the general prohibition as long as that DPB had in place appropriate regulatory arrangements. The FCA has made it clear that for us to satisfy this requirement in relation to consumer credit activities, we would have to incorporate the whole, or substantial parts, of its consumer credit activities sourcebook (CONC) into our Handbook.

Why is that a problem?

We do not believe this is satisfactory position.

The FCA’s regulatory regime for consumer credit, as laid out in CONC, is very prescriptive. While the FCA has decided this appropriate for its purposes, this is not in line with our own regime for regulating the legal market.

Also, we do not have the resources to develop and replicate the expertise that FCA has, or to regulate in the way that appears to be required. Ultimately, that would put the consumer at risk if it diverts resources from our core activities in the legal market.

Finally, we would be responsible for the supervision and enforcement of rules over which we have no control. Though you may have considered the FCA’s consultations on its rules and regulatory arrangements, the rules would not have been debated by our board and there would not have been any input from the Law Society.

We have asked HM Treasury to consider extending the consumer credit activities exclusion for contentious businesses to cover pre-issue work carried out by solicitors. If the exclusion were extended, firms regulated by the SRA would be in a similar position in relation to such pre-issue work as they were under the OFT Consumer Credit Group licence.

Is there another option?

We do not believe that we should take on these additional responsibilities unless we are satisfied that it is in the public interest to do so and that it is necessary for professional firms to comply with a prescriptive set of rules. So we are proposing that those of you we regulate and who carry on regulated consumer credit activities should in fact seek authorisation directly from the FCA, rather than us adopting the CONC into our Handbook so you can rely on the Part 20 exemption.

A consultation on this proposal will start on 8 October and last for 10 weeks.

In the consultation, we ask:

• Do you agree with the proposal that firms carrying on any regulated consumer credit activities should be required to seek authorisation directly from the FCA and not be able to rely on the Part 20 exemption set out in FSMA?
• If you do not agree with the proposal, please offer any alternative suggestions for ensuring that the SRA’s regulatory arrangements in relation to consumer credit activities are targeted, proportionate and do not result in the incorporation of the FCA’s CONC and do not impose unnecessary costs and regulatory burdens on firms.
• Do you have any views about our assessment of the impact of these changes and, are there any impacts, available data or evidence that we should consider in finalising our impact assessment?

One of the main reasons for introducing the concept of DPBs was to avoid firms being subject to two regulatory regimes, something we know is not attractive to a great many of you.

However, in the case of consumer credit activities it would seem likely that SRA-authorised firms would be required to comply with the same rules irrespective of whether they were authorised by the FCA to carry on these activities or are carrying them on under the Part 20 regime.

This is not the way that the Part 20 regime operates in relation to other areas of FSMA-regulated activities. furthermore we would be asking the LSB to approve rules over which we had no control.

What can solicitors do?

We urge as many of you as possible to read the consultation document, absorb the information contained within it, and respond accordingly.

We will of course continue to review the content of the FCA’s CONC and the extent to which equivalent provisions already exist in the SRA Handbook. There are many other issues to consider too, for example we have asked HM Treasury to decide if firms providing clients with the facility to pay professional fees by instalments should be regulated.

If the position changes between now and April 2015, then our next steps will need to be considered accordingly and we will of course keep you up-to-date. For now, though, we would ask you to look out for the consultation when it is published on our website and take the opportunity to have your say.

The consultation is available here.

Crispin Passmore is the SRA’s executive director for policy