TO OUR MEMBERS
SRA consultation – have your say!
The SRA wants your views on its proposals last month to regulate consumer credit activities carried on by SRA-authorised individuals and firms under Part 20 of the Financial Services and Markets Act 2000 (FSMA)
The FSMA prescribes that certain consumer credit activities must be regulated, following changes which took effect on 1 April 2014. These activities include credit broking, debt adjusting, consumer credit and debt counselling. From that date, regulating consumer credit activities transferred from the Office of Fair Trading to the Financial Conduct Authority (FCA). Under Part 20 of the FSMA, members of a "Designated Professional Body", such as firms authorised by the SRA, are exempt from the requirement to be authorised by the FCA in order to carry out FSMA regulated activities.
After earlier consultations, the SRA believes it will be beneficial to remain within Part 20 rather than withdraw from it. The SRA must therefore implement rules to govern the provision of consumer credit activities. These must then be approved by the FCA and Legal Services Board.
The SRA’s objective is for consumer credit activities to be regulated by the SRA if they naturally form part of legal services and provide benefits to consumers - such as deferred payment arrangements. The SRA has worked closely with HMRC and the FCA to extend some of the existing exclusions which narrow the scope of those activities requiring FSMA regulation.
For example, the "contentious business" exclusion in the FSMA has been extended to allow certain consumer credit activities, such as debt collecting, to be excluded from FSMA regulation. This applies where those activities are undertaken by solicitors (or other persons authorised under the Legal Services Act 2007) in the course of providing advocacy services or litigation services. There has also been an increase in the number of instalments over which services and transactions can be financed: with effect from 18 March 2015, the number of instalments falling within the exemption increased from four to twelve.
Questions to consider
- What work can a firm do under Part 20?
- What should you do if you are asked to represent a client in a litigation matter which has arisen from a consumer credit or hire agreement?
- What should you do if a client asks for or requires debt advice resulting from another matter on which the firm is working for that client?
- Do credit activities include the postponement or staged payment of fees?
SRA Question and Answer section
The SRA wants to be clear about what activities are distinct, specialist consumer credit services which should be regulated by the FCA. To protect consumers properly, the SRA plans to define clearly the list of prohibited activities and thereby adopt a proportionate set of regulatory requirements.
The SRA proposes to amend the Scope Rules to prohibit regulated firms from carrying out the following consumer credit activities under Part 20:
- Entering into a regulated credit agreement as lender - except where the regulated credit agreement relates to paying disbursements or professional fees
- Exercising, or having the right to exercise, the lender’s rights and duties under a regulated credit agreement - except where the regulated credit agreement relates to paying disbursements or professional fees
- Entering into a regulated consumer hire agreement as owner
- Exercising, or having the right to exercise, the owner’s rights and duties under a regulated consumer hire agreement; or
- Operating an electronic system in relation to peer-to-peer lending; or entering into a peer-to-peer lending agreement; or exercising or having the right to exercise rights and duties under that agreement.
The SRA proposes restrictions on firms carrying on permitted consumer credit activities. These will prevent firms from:
- Providing the client with credit card cheques, a credit or store card, credit tokens, running account credit, a current account or high-cost short-term credit
- Holding a continuous payment authority over the client’s personal account
- Taking any article from the client in pledge or pawn as security for the transaction (pawnbroking)
- Entering into a regulated credit agreement as lender, which is secured on land by a legal or equitable mortgage
- Entering into a regulated credit agreement, as lender, which includes variable rates of interest
- Providing a debt management plan to a client. A debt management plan is a non-statutory agreement between a client and one or more of the client's lenders. Its aim is to discharge or liquidate the debts by making any payments to a third party, which administers and reviews the plan and distributes money to creditors
- Charging a separate fee for credit broking services or attributing any element of the firm's fees to those services.
SRA seek feedback
It is uncommon for firms to undertake the activities listed above unless they are conducting business requiring separate FCA authorisation. However, the SRA has so far not collected targeted information from those they regulate about the consumer credit activities they carry out or about those for which they have sought FCA authorisation to date.
So the SRA is particularly keen to gather information as part of this consultation about whether stakeholders agree with their assumptions in this respect. The SRA wants to know if it is prohibiting activities which fall into the above category and which are likely to be to the detriment of firms and consumers. It invites you to give them details of any additional protection you believe would be appropriate to enact in the light of any risks these activities may present. The SRA will use this information to review the proposals and the list of proposed prohibitions.
Have your say ILFM Members SURVEY
If these proposals affect your practice, we encourage members to read the full consultation and provide feedback to the SRA by 7 August 2015.
- Do you agree it is appropriate for the consumer credit activities set out above to be 'prohibited' from regulation by the SRA under Part 20 FSMA?
- What is the likely impact of the prohibitions for firms and consumers?
- Should any of the proposed activities be allowed or the prohibitions or restrictions be modified?
- If so, do you believe that any additional consumer protections should be put in place to address any specific risks that these activities present?
The consultation closes on Friday 7 August 2015. The SRA aims to publish its final regulatory arrangements in November 2015 to take effect in April 2016.
The legislative changes are not retrospective and arrangements entered into before 18 March 2015 will remain regulated under the previous provisions.