The Financial Conduct Authority (FCA) will take over from the Office of Fair Trading (OFT) on 1 April 2014.

On the 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA). Exactly one year later is when the FCA will take over from the OFT.

The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.

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.

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.

Key proposals:

• 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.

• 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.

Martin Wheatley, FCA 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.”

Payday loans:

Proposals for the regime emphasise stronger consumer protection and tougher requirements for payday lenders, including a mandatory affordability check on borrowers and limiting the number of loan roll-overs. The use of continuous payment authority (CPA) will also be restricted.

• 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.

• Advertisements will be monitored and there will be tighter restrictions on what payday lenders can say in them, while the FCA will be able to ban any that are misleading.

The FCA will also take into account the findings of the Competition Commission’s study on payday lending when they are published.
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.”

Crowdfunding/Peer-to-peer:

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.

A separate consultation on crowdfunding, including lending/investing aspects of pee-to-peer lending, will be published later in October.

Registration:

Many consumer credit firms are already registering with the FCA for an interim permission that will allow them to continue to carry on business after 1 April 2014. A 30 per cent discount is available to firms that register before the end of November. From 1 April,

applications for full authorisation can be made and the FCA will aim to determine a full and accurate application within six months of receipt of a complete application. Firms without an interim permission cannot carry on credit activities until an application for full authorisation is approved. So far around 9,000 firms have registered for an interim permission.

Click here to find out more about interim permissions.

Consultation Feedback:

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.

To read the FCA’s consultation paper click here.

Send the FCA your comments about the proposals in its online response form here.

FCA Timetable: