Consumer credit regulation – what’s changed?

With the Financial Conduct Authority (FCA) now responsible for regulating consumer credit firms are faced with a very different set of standards than before. The new rules are at least unfamiliar and may be seen by some as rather demanding.

Prior to the FCA the Office of Fair Trading (OFT) were responsible for overseeing consumer lending and they operated with a comparatively ‘light touch’. The OFT had no power to take any action against firms and were able only encourage good practice through advice and guidance. This allowed unscrupulous firms to take advantage of vulnerable customers and in many sectors irresponsible consumer lending became the norm. In order to protect customer interests the government felt that a new regulator invested with greater authority should be appointed.

The contrast between the OFT and the way that the FCA now act is quite marked. Rather than stipulate a set of clear rules the FCA have created a set of principles with the onus now on firms to create their own rules by demonstrating how they will operate within the principles. Also the FCA are invested with far greater powers of enforcement. They are able to fine a firm very large amounts and to revoke licenses so that a firm cannot legally conduct consumer credit business.

Whilst it is easy to be anxious or fearful of such power it’s actually something that the finance industry should take comfort in as it will improve standards and create more sustainable ways of doing business.

The authorisation process prepares a firm to operate in a complaint way but where an authorised firm fails to operate in the way that it has committed to then it will very quickly become subject to an enforcement action from the FCA. This is often in the form in the form of a form of a skilled person review. The FCA appoints a member of their ‘Skilled Persons Panel’ to carry out a very detailed investigation. This is not only intrusive and disruptive but it is done at the firm’s expense and can be very expensive. Also the remedial actions that are required of a firm can add further time and costs. Even afterwards the firm will remain under a high level of scrutiny from the FCA with little leniency allowed. In very severe cases the FCA will withdraw a firms permission, either permanently, or until they are satisfied that the firm has made sufficient improvements.

Outside of enforcement all firms will have some form of interaction on with the FCA. This may be in the form of questions that arise during the authorisation process, routine reporting and occasionally where the FCA may have concerns, they may seek clarification on particular areas of conduct. Firms who are cooperative with the FCA and receptive to their advice will build a positive and productive relationship with the regulator.

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