The Financial Services Bill

The Financial Services Bill (the Bill) was introduced in the House of Commons on 26 January.

The Bill will fundamentally reform the current regulatory system by:

• giving the Bank of England, specifically the Financial Policy Committee (FPC), macro-prudential responsibility for oversight of the financial system;
• handing day-to-day prudential supervision of significant financial services firms to the Prudential Regulation Authority (PRA), established as a subsidiary of the Bank of England; and
• creating a proactive new conduct of business regulator, the Financial Conduct Authority (FCA), to protect consumers, promote competition and ensure integrity in markets.

What Has It Got To Do With Consumer Credit?

A relatively unheralded part of the Bill, but one that could have enormous implications, is Article 6. This Article seeks to extend the scope of “regulated activities” under the Financial Services and Markets Act 2000 (FSMA) to include loans and other forms of credit (whether secured on land or not) and the hiring of goods.

If this extension happens, those offering credit or hiring goods will need to seek a licence from FCA under FSMA. Many of these activities are currently only licensed by the Office of Fair Trading (OFT) under the Consumer Credit Act 1974 (CCA).

So What Will Happen To The CCA And OFT?

HM Treasury's policy document accompanying the Bill states that the Government "believes that fundamental change is necessary to ensure that regulation is able to keep up with a rapidly changing market and to tackle detrimental practices more swiftly. The Government also believes that this change can best be achieved by bringing consumer credit into the same regulatory regime as other financial services (FSMA), while retaining the existing consumer rights and protections in the CCA."

So it seems that the majority of the CCA provisions would move across to FSMA. Whether the CCA would continue to exist and, if so, what would be in it is unclear. It is also unclear what role, if any, OFT would play going forward.

What Would This Mean For Consumer Credit Businesses?

For the sake of a consistent approach to all financial services, having a single regulator makes a degree of sense. However, regulation must recognise that a different set of regulatory problems can arise under consumer credit compared to other financial products. It also underestimates the problem of merging disparate regimes that have operated independently for so long.

If FCA's approach to licensing mirrors that of the Financial Services Authority (FSA), then those creditors currently authorised only by OFT will face a much more onerous authorisation process and find themselves subject to much greater ongoing regulatory scrutiny. FSA has become, and FCA will be, a proactive and interventionist regulator, while OFT has applied a lighter, reactive, approach.

Whatever happens, though, UK law must continue to comply with the Consumer Credit Directive (CCD), which has been in force in the UK only since 1 February 2011. Those rules now in the CCA relating to, for example, advertising, pre-contractual information, creditworthiness and the right of withdrawal will have to stay, whatever legislation they are in.

Why Is Change Needed?

Creditors have had to deal with significant regulatory change in recent years: for example, the CCD, the Payment Services Regulations, the consequences of the bank charges case, the Lending Code, the revamped Debt Collection Guidance, the investigation into store cards and the staggered introduction of the Consumer Credit Act 2006. So why is an overhaul of licensing requirements and a new regulatory style needed now?

According to Treasury, “it means that in the future there will be much greater scrutiny of applications for credit licences, and it extends the FCA’s powers to make rules, ban products, issue unlimited fines and require firms to pay redress to consumers in the field of consumer credit.”

Some of these references relate at least in part to the widely-publicised bank charges case relating to charges incurred by customers whose bank accounts became overdrawn. As a result, the issue largely fell within OFT's remit. FSA was powerless to intervene to stop banks raising money in this way. If consumer credit regulation moves to FCA then (subject to any restrictions at European level), FCA may seek to restrict what charges banks can levy in this area. The result could be the end of free banking as banks seek an alternative source of funding.

When Will All This Happen?

In the immediate future, the Parliamentary Committee looking at the Bill is due to report in late March. There is then much more work to be done before the Government’s planned adoption of the new Act before the end of the year, and the implementation of the changes early in 2013. The Government has at least left the door open to make the consumer credit changes at any time, but may decide it is better to implement all changes as close to the same time as possible.

We have also produced a summary of the Bill.

For more information, please contact edward.hickman@snrdenton.com, emma.radmore@snrdenton.com or your usual SNR Denton contact.

Law stated as at 29 March 2012