FCA sets out how it will regulate consumer markets

Last post: Oct 8, 2013

The FCA have offered new guidance on the regulation on consumer markets. Here we comment on the key points.

Starting April of next year the Financial Conduct Authority (FCA) will be taking over regulation of consumer credit which used to be under the Office of Fair Trading (OFT).  Under the new regime, a balance will be sought between protecting consumers and allowing businesses to flourish. Changes will include stricter requirements for payday lenders, such as mandatory affordability checks on borrowers, as well as limiting the number of times the continuous payment authority (CPA) can be used and the number of times a loan can be rolled over.  Marketing and advertising content will also be scrutinized to prevent any misleading claims and bans can be implemented to those that are proven guilty of these offenses. Payday lending is an important service to consumers in need of credit and many utilize this and get to pay off their debt without any problems.  What are being prevented are lenders being able to drain money from a borrower's account. Any individual or company offering personal loans, goods and services for hire or on credit, debt adjusting or counseling services, and those offering credit cards will all be governed by the FCA.  This includes the 50,000 firms currently holding credit licenses. The final rules and regulations for this regime will be finalized by February 2014.  Consultation for comments and suggestions from both the consumer and business sectors will be open until the 3rd of December 2013.  These rules strive for the public to get enough information about various financial products and services being offered, as well as for consumers to know their rights and protection that can be offered to those in financial difficulty.  Existing OFT standards will be carried over as well as additional policies such as the following.  All of these will be contained in the new Consumer Credit Sourcebook.
  • Mandatory affordability checks to ensure that borrowers would only avail of loans that they are capable of repaying.
  • Proper screening of individuals or companies that intend to do consumer credit business and to ensure that these companies have suitable and sustainable business models.
  • All marketing campaigns and material must be fair, clear, and never misleading.  A ban will be put on adverts that are proved to do so.
  • Those that offer riskier financial products would need to undergo tougher scrutiny.  Specifically, the payday sector may be confined to the following:
    • Loan rollovers will be limited to two
    • Access to a lenders bank account through the use of a CPA will also be limited to two times
    • Proper debt advice will be given free of charge to borrowers who rollover their loans
    • Warnings on potential risks and information on how to avail of debt advice shall be included in all forms of advertisements and promotional campaigns
  • Access for all and fair treatment under the Financial Ombudsman Service.  Though the inclusion of consumer credit to the Financial Services Compensation Scheme has yet to be determined.
  • Companies that engage in poor practices, money laundering or other unauthorized business will face thorough investigation and stiffer penalties.
Peer to peer lenders must assess the creditworthiness of a borrower and disclose to them all major features of the loan, as well as the risks involved prior to granting them credit.  A cooling off period of 14 days will be given wherein the borrower may decide to withdraw from the agreement or to cancel the loan. Studies involving factors such as competition and how this would improve the overall market are also under consideration, especially the results and findings of the Competition Commission's study on payday lending.