In this article, I want to talk about the regulation of consumer credit and how that relates to the collection of debt. On April 1st, 2014 the responsibility for regulating consumer credit was transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA), the OFT was then closed.
What does this mean?
The move was first announced by the Government back in January 2013. However, it stems from the need, back in the 1980's, to create one central body from the wide range of regulatory agencies, with a huge variety of titles, that each covered a separate area of the financial services industry.
Firms that held their own OFT-issued consumer credit licence before April 2014 could apply for FCA interim permission to continue to operate while they applied for full FCA authorisation. However many firms who operated under an OFT group licence, such as the Law Society's group licence, had to obtain their own OFT-issued consumer credit licence before April 2014, to apply for FCA interim permission. As this mainly affected Solicitors who specialised in the debt services market.
The Solicitors Regulatory Authority (SRA) has recently published a consultation that states that solicitors can be exempt from FCA authorisation, under Part 20 of the Financial Services and Markets Act (Provision of Financial Services by Members of the Professions).
The proposals mean that solicitors could continue to provide consumer credit services including debt collection if the service is incidental to the firm's overall services.
However, businesses that carry out these functions as the central part of their business will still need full FCA authorisation.
The FCA has stated that the level of regulation would depend on whether it sees you firm as in a 'high' risk group. Such as payday lenders, pawn brokers and debt collection, or in a 'low' risk group such as 'not for profit' debt counselling and retailers and motor dealers for whom credit is a secondary activity. Firms who are perceived to be in the 'high' risk group will be expected to pay higher fees to the FCA as a result.
To obtain FCA authorisation firms must first satisfy the regulator that they meet its 'Threshold Conditions', which include:
FCA and Debt Collection
The FCA has greater resources to supervise firms than the OFT and has more wide-ranging powers.
The FCA sees debt collecting as the collection of debt from a 'customer' of a credit agreement or a consumer hire agreement. What it sees as regulated debt. Unregulated debt is viewed as a debt owed to you personally and also commercial, business to business debt.
It defines a 'customer' as an an 'individual' who undertook the credit agreement or an 'individual' providing a guarantee or indemnity under a credit agreement.
An 'individual' can be:
The definition of debt collection by the FCA is much narrower than previous regulatory agencies. A case in point is if as an advisor, one of your clients falls behind on a regulated agreement and you collect monies from them to send to the contract provider, you are seen to be gathering that debt and need to be authorised even though that doesn't seem to be the case.
The FCA has set out how 'customers' must be treated by FCA authorised firms concerning debt collection. Failure to follow its practices contained in the FCA's conduct rules, which are listed in the 'Arrears, Default and Recovery' section of the Consumer Credit Sourcebook (CONC 7). Failure to follow these standards can result in fines and other methods of enforcement set out in the FCA's Enforcement Guide.
In a previous article, I expressed the view that "The modern face of UK debt collection is one of professionalism, of FCA regulation and of maintaining healthy relationships with clients and their customers." The article was on the reputation of the debt collections industry.
I would like to add to that by saying that sensible and intelligent regulation, which protects the rights of the customer, while allowing the efficient recoveries of monies owed, can only be a good thing for this industry.
Regulation of the debt collection industry by the FCA is still in its infancy. At the time of this article, most debt collection firms are still in 'Interim Permission'. It will, therefore, be fascinating to see how the next twelve months pan out.
By Kevin Bishop - Senior Partner at Town and Country Legal Services LLP