As the clock ticks down towards stricter consumer credit regulations early next year there’s growing concern that many firms involved in commercial finance are unaware that they fall under the Financial Conduct Authority’s new regime.
As the clock ticks down towards stricter consumer credit regulations early next year there’s growing concern that many firms involved in commercial finance are unaware that they fall under the Financial Conduct Authority’s new regime.
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Companies involved in leasing on a business-to-business level may well feel that their work is not covered by consumer legislation. But the scope of the new regime is wide enough to cover many businesses and almost every firm involved in the provision of credit – even if it is just by making introductions to a third party – will likely need to either apply for FCA authorisation or make alternative arrangements.
The penalties for not doing so will be severe, as a breach of the "general prohibition" will be a criminal offence, punishable by up to two years in jail for directors or officers of a company, and an unlimited fine.
Much business finance falls under the consumer credit regime. The new rules clearly state that credit broking is a regulated activity requiring FCA authorisation where the borrower is an individual or "relevant recipient of credit". That crucial category includes sole traders and partnerships and applies regardless of the amount of credit being supplied, or whether it is intended for business purposes.
This brings activities such as making introductions to finance companies relating to business purpose credit agreements and hire agreements within the FCA’s consumer credit regime.
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By GlobalDataFor example, a provider of commercial products or corporate services who introduces a customer to a finance company, in order to facilitate a sale of its products and perhaps to gain a commission, will fall under the regime if any of its customers are deemed to be "relevant recipients". The introduction will be classed as a separate activity to the actual arrangement of finance, bringing the provider’s sales department into regulated territory.
The fact that the ultimate provider of the finance has FCA authorisation would not cover the company making the introduction.
The FCA has been operating an interim permission system, which has been lighter in touch and easier to sign up for. But although it comes to an end in less than a year, only around a tenth of the firms currently using it have reportedly so far applied for full authorisation – a much more costly and onerous process that will be necessary after next March.
Around 3,000 firms were invited by the FCA to apply for full authorisation, as it started moving to the new system. The low take-up so far is perhaps not surprising, given that there are far more onerous obligations under the full FCA regime than under the interim system, as well as a greater cost to secure authorisation.
The process will take months rather than weeks, making it even more worrying that so many are delaying their applications until the last minute.
Both in terms of the application and to the ongoing requirements post-application, the FCA’s requirements are exacting, with broader impacts on the business and its group than the interim system. In particular the proposed "controllers" of the applicant – including shareholders holding 10% or more and others who fall within the broad definition – will be required to be approved by the FCA. This is an ongoing requirement and any change in "control" including a change in the holding of an already approved shareholder will require prior FCA approval, with criminal sanctions attached to a breach of this rule. That could prove a significant constraint on a business and its group.
However, failure to take action is not an option. A business must be FCA authorised with the relevant permissions or be exempt from the need to be authorised if it intends to carry on consumer credit regulated activities in the UK. Penalties for breach are severe, with the firm potentially finding itself unable to enforce legal agreements on top of any fines or other criminal sanctions, and the reputational impact they are likely to have.
The main alternative to becoming authorised is to become an appointed representative of a firm that will act as a ‘principal’, allowing credit broking activities to be undertaken without direct authorisation, within certain criteria. The option will be available to most consumer credit businesses and will allow firms to avoid the full cost of obtaining and maintaining their own FCA authorisation. Becoming an appointed representative is a more straightforward process and can be completed in a matter of weeks, and the ongoing compliance costs are likely to be considerably lower. There is also flexibility for businesses to become appointed representatives during a transitional period before going on to become FCA authorised in their own right.
Acting as a principal involves a considerable burden and responsibility, and many finance firms will feel they have enough to do keeping their own house in order. However, there are some firms that have the resources and systems and controls to carry this burden and make it their business to do so by providing such services.
It is likely that they will be in high demand as time runs out for credit broking firms using the interim regime, but professional services providers, such as law firms, may be able to make introductions to potential principals, to help those running out of time to comply with the pending changes.
Ian Benson is a director in the financial services practice group of commercial legal firm Maclay Murray & Spens LLP
