Regulatory Outlook | Consumer Finance | July 2018

Current issues

FCA high-cost credit review

The FCA has published two consultation papers following its review into the potential for consumer harm in the high-cost short term credit market.

In CP18/12, the FCA has proposed new rules and guidance aimed at the rent-to-own, home-collected credit, catalogue credit and store cards sectors, seeking to increase customer transparency and fairness in relation to the way these products operate.  The FCA also explains its plans for further work assessing potential rules to introduce a price cap on rent-to-own goods, and the level and structure of a possible cap.

CP18/13 sets out prospective new rules to: improve the visibility and content of key information provided to customers; introduce tools to enable customers to calculate the cost of using an overdraft; and send consumers overdraft alerts to address unexpected overdraft use.

The FCA also sets out for discussion proposed measures to:

• simplify overdraft pricing structures;
• provide for a potential backstop price cap for overdraft charges;
• provide guidance around exactly which costs firms should consider when ensuring refused payment fees reasonably reflect the actual costs; and
• address the repeat use of overdrafts by customers.

Fairness of variation terms in financial services consumer contracts

The FCA is consulting on new guidance outlining the factors financial services firms should consider under the Consumer Rights Act 2015 when drafting and reviewing variation terms in their consumer contracts.

The draft guidance outlines a number of factors firms should consider in order to achieve transparency and fairness when drafting and reviewing variation terms, including:

• the scope and effect of the variation clause and whether the reason for varying the term is based on a valid reason;
• the transparency of the variation clause;
• provision for notice in the variation term to enable the consumer to reflect on the change and take appropriate action; and
• the ability for the consumer to terminate the agreement if they do not wish to accept the variation.

The FCA plans to publish feedback on the guidance in December 2018.  Once the guidance is finalised, it should be read in conjunction with the material on unfair terms available on the FCA's website, together with the Competition and Markets Authority's unfair contract terms guidance.

Senior Manager and Certification Regime

The senior managers and certification regime (SMCR), which came into force for deposit-taking firms in March 2016 and is due to come into force for dual-regulated insurers from 10 December 2018, will be extended to all firms that are solo-regulated by the FCA, from mid- to late-2019.

The SMCR will replace the current approved persons regime, with the aim of reducing harm to consumers by increasing individual accountability for those in senior management positions.  Those acting as senior managers will be required to be approved by the FCA before they start their role and have a statement of responsibilities.  This will need to be provided to the FCA.  Senior managers will also have a "duty of responsibility", which means that, where something goes wrong, they will need to demonstrate to the FCA that they took reasonable steps to prevent harm from occurring.

The certification regime will apply to employees who are not in senior management roles, but whose position means they could cause harm to customers, the firm and/or market integrity. Firms will be required to "certify", at least once a year, that these individuals have the relevant competency to fulfil their roles.

The FCA is also proposing to introduce new conduct rules, which will apply to most employees who work in the financial services sector.

FCA Policy Statement on creditworthiness and affordability

During 2017, the FCA consulted on new rules relating to assessing creditworthiness and affordability.

However, the industry raised concerns that the proposed rules went further than improving transparency, and that they sought to significantly change the existing regime. For example, under the proposed rules, firms would not be able to take household income into account, which could lead to some customers experiencing financial exclusion.

Following industry feedback, the FCA has indicated that it will publish a Policy Statement in summer 2018, setting out its new rules on assessing creditworthiness in consumer credit.

In Focus: Brexit

Is any new EU legislation expected to come into force and effect before the end of the transition period?

The consumer finance industry as a whole has experienced a great deal of change over the last 10 years, particularly as a result of the implementation of new EU legislation. This includes the Consumer Credit Directive (CCD) in 2011, the Consumer Rights Directive, which was implemented over a number of years between 2013 and 2015, the Mortgage Credit Directive (MCD) in 2016 and, most recently, the second Payment Services Directive from 13 January 2018.

When it comes to lending to consumers, we now have equivalent regimes across the EU Member States in terms of the requirement to provide consumers with certain information before entering into a loan agreement or mortgage.

As a result, we are not currently envisaging any new EU legislation being implemented before the end of the proposed transition period that specifically impacts the consumer finance industry.

Is a new regulator needed, or do additional powers to be given to an existing regulator?

No. The FCA will continue to regulate firms that provide loans and mortgages to individuals for non-business purposes post-Brexit.

Is there an existing "equivalence" or "recognition" regime for recognising Third Country regulatory regimes?

As we say above, the regulatory regimes for consumer credit and mortgage lending have been harmonised across the EU, with all member states being required to implement the CCD and MCD, as maximum harmonisation directives, into their own jurisdiction.

At present, there is no existing regime for recognising other countries' regulatory regimes.

Does current UK government policy mean that (subject to the terms of a future trade agreement between the UK and the EU) material changes to regulation or enforcement are likely post-Brexit?

We do not anticipate the UK government making any material changes to the existing consumer credit or regulated mortgage regime immediately following Brexit, given the number of recent changes to legislation in this area.

However, given that a great deal of existing UK consumer finance law is based on the implementation of EU Directives such as the CCD and MCD, Brexit presents the opportunity for the industry to lobby the government and the FCA with its suggestions for simplifying the current consumer credit and mortgages regime in certain areas.

The government is more likely to be receptive to moving away from a single market approach in these areas, given that, ordinarily, borrowers look to obtain a loan or a mortgage in their home country, rather than shopping around abroad.

We anticipate that the FCA is likely to take a "wait and see" approach in relation to suggesting any changes to the existing rules and legislation in view of Brexit, to avoid requiring firms to make multiple changes to their systems, processes and documentation which could not only be costly, but could create confusion for borrowers.

What should businesses be doing now to prepare for Brexit?

From a UK law perspective, firms that are established in the UK and who only lend to UK-based customers, will not need to take any specific action to prepare for Brexit.

However, firms that currently rely on passporting rights under the Banking Consolidation Directive or the MCD to offer consumer finance from another Member State into the UK, or vice versa; will need to consider whether they wish to continue to provide these products in the relevant jurisdiction(s) post-Brexit.

If so, and in the absence of any agreement being reached between the UK and the EU in relation to an equivalence regime, firms will need to decide whether they should set up a branch or a subsidiary in the relevant jurisdiction, and what that might involve in terms of obtaining necessary regulatory permissions or licenses.

Dates for the Diary