IMPORTANT CHANGES TO THE CONSUMER CREDIT LICENCE REGIME THAT AFFECTS ALL CA FIRMS The UK Government has recently announced important changes to Consumer Credit regulation with effect from 1 April 2014. In this article, we explain our understanding of the current position and highlight to ICAS Members and firms what they need to do. If you are engaged in any consumer credit activity then it is important that you consider your activities and the next steps now (if you havent already done so) as the changes will affect your firm. We will update this article as matters develop. Need more information about consumer credit activities?

Consumer Credit section of the FCA website

Consumer Credit section of the OFT

WHAT IS CHANGING? A CHANGE OF REGULATOR The consumer credit licensing regime will transfer from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) with effect from 1 April 2014. Over the last few months, the FCA has consulted on its proposed changes to the regime (see CP 13-07 and CP 13-10). THE END OF THE GROUP LICENCE The group consumer licence regime currently provides general consumer credit permissions to the firms in which our Members work where that firm is subject to monitoring and regulation by ICAS. The FCA no longer intends to issue group licences to professional bodies and they will cease on 1 April 2014.

WHAT DO THESE CHANGES MEAN? The impact for your firm depends on the type and extent of your consumer credit activities and your authorisation status for financial services. You should identify the potential consumer credit activities that you provide, if you have not done so already. The two most common consumer credit activities that we see our firms being engaged in are:

fee payment by instalment (this is classed as consumer credit or the other term is entering into a

regulated credit agreement). Although please note there is an exemption for any instalment

arrangements where there are less than four payments in a 12 month period and no interest is

charged; and

referring or introducing clients to a finance company, such as Premium Credit, to allow clients to

pay their fee by instalments (this introduction is classed as credit brokerage).

See the FAQs section for help in identifying any consumer credit activities.

Becoming an Exempt Professional Firm If you are not currently authorised by the FCA for financial services and your consumer credit activities are incidental, arising out of, and complementary to the provision of professional accountancy services you will be an exempt professional firm under our ICAS Designated Professional Body (DPB) scheme. The activities (as long as incidental) covered under the regime are likely to be limited to the consumer credit activities covered under the previous group consumer credit licence (entering into a regulated credit agreement, credit brokerage, debt-adjusting, debt-counselling, debt administration and credit information services) and not the other activities not currently covered (consumer hire, debt collecting, credit reference agency or peer to peer lending).

http://www.fca.org.uk/firms/firm-types/consumer-credithttp://oft.gov.uk/OFTwork/credit-licensing/do-you-needhttp://www.fca.org.uk/news/cp13-10-consumer-credit-detailed-proposals

Our CA firms meeting the exempt professional firm criteria above should be covered automatically from 1 April 2014 by our transitional regulations until 1 October 2014. On 1 October 2014 we will roll out our full DPB regime and, at this moment in time, we are hoping that the FCA will allow us to operate an automatic coverage scheme for our CA firms rather than requiring each firm to obtain a licence. Becoming an FCA licenced firm An anomaly of the proposed change is that consumer credit and financial services are considered together and firms will only be allowed to be exempt for both activities or authorised for both. Firms are not allowed to be authorised for one area and exempt for the other. You will require to apply for an interim permission of interim variation of permission from the FCA if:

your firm currently holds a consumer credit licence issued directly by the OFT and you intend to continue to conduct non-incidental consumer credit activities. Please note you would no longer eligible to be DPB licensed for investment business and your FCA licence would need to cover both; or

your firm is authorised directly by the FCA for financial services; or

if your consumer credit activities are not incidental (again you would no longer be eligible to be DPB licensed for financial services and would need to be licensed by the FCA for both).

The FCA will be issuing reminders to these firms, who will need to apply before 1 April 2014 so as to enable the firm to take advantage of the FCA transitional arrangements which will be in place from 1 April to 1 October 2014. See below for more information.

IF I MEET THE EXEMPT PROFESSIONAL FIRM CRITERIA HOW AM I COVERED BY THE DPB SCHEME? The FCA has granted the professional bodies a transitional period of six months from 1 April 2014 to 1 October 2014 to get our schemes up and running and we are working with the FCA to reach agreement on how the new DPB regime will operate and what form the regulations will take. In the meantime we will be introducing transitional regulations so that all CA firms meeting the exempt professional firm criteria will be automatically covered by the transitional regulations. We will be working hard to persuade the FCA to allow us to administer the full DPB scheme, operational from 1 October 2014, in as straightforward and least costly a way as possible, and hope to operate a blanket scheme, similar to the group licence, that covers all eligible exempt professional CA firms not directly licensed with the FCA.

HOW DO I GO ABOUT GETTING AN FCA INTERIM PERMISSION OR INTERIM VARIATION OF PERMISSION? Forms and guidance in relation to registering for interim permission can be obtained from the FCA website at Apply for a new credit licence Financial Conduct Authority Only firms that have a current OFT consumer credit licence are eligible to register for an interim permission or an interim variation of permission. If your firm does not have an OFT licence this will require to be obtained first. Forms and information can be obtained from Apply for new credit licence The Office of Fair Trading. The FCA fee for interim permission is 350 for firms and 150 for sole practitioners. The OFT fee for firms is 1,466 and 670 for sole practitioners. Firms with interim permissions and interim variation of permissions will subsequently be considered for full authorisation or for a full variation of permission by the FCA in due course between 1 October 2014 and 1 April 2016 and there will be phased application

FREQUENTLY ASKED QUESTIONS

http://www.fca.org.uk/firms/firm-types/consumer-credit/consumer-credit-interimhttp://www.oft.gov.uk/OFTwork/credit-licensing/apply/;jsessionid=B8C191FCBEDB3A3B445620B71B79D951http://www.oft.gov.uk/OFTwork/credit-licensing/apply/;jsessionid=B8C191FCBEDB3A3B445620B71B79D951

Who is a Consumer? The FCA draft Consumer Credit sourcebook refers to customer (taken to mean the same as consumer) as being an individual using the services of a firm which provides the various regulated consumer credit activities. The definition of individual in the Consumer Credit Act includes not only a natural person but also:

a partnership consisting of two or three persons not all of whom are bodies corporate, and

an unincorporated body of persons which does not consist entirely of bodies corporate

Hence the definition of consumer includes natural persons, small partnerships and unincorporated entities as defined above but not corporate bodies. What is the DPB regime? If your firm s only conducting consumer credit activities which are incidental, arising out of, and complementary to the provision of professional accountancy services, your firm may be eligible to be an exempt professional firm under the Part 20 Designed Professional Body (DPB) regime operated by ICAS. This is similar to the current ICAS DPB regime in place for professional firms involved in exempt regulated financial services activities. ICAS is already a DPB for financial services and will be a DPB for consumer credit. For the meaning of incidental; see the FAQ section of this website. What is Credit? 'Credit' is defined in the Act as a cash loan, and any other form of financial accommodation - that is, any circumstances in which the debtor is allowed time to pay. It includes a hire-purchase agreement. What do you mean by consumer credit activities? In broad terms, the consumer credit activities, as currently covered by the group consumer licence, are:

Consumer credit

Credit brokerage

Debt-adjusting

Debt-counselling

Debt administration; and

Provision of credit information services (including credit repair) (e.g. providing credit

ratings/history and the correction of wrong information in relation to a persons credit standing).

Further consumer credit activities currently conducted by Insolvency Practitioners under the liquidators and receivers licence are:

Consumer hire;

Debt collecting; and

Credit reference agency.

There will also be a new consumer credit activity of peer to peer lending under the new Regulated Activities Order. Please see further FAQs for definitions of each activity What does incidental, complimentary and arising out of mean? This concept is not a new one to firms who are already DPB licensed for exempt regulated financial services activities with ICAS (i.e. who we call DPB firms). Firms are advised to refer to Schedule 3 of the DPB handbook which provides guidance on incidentality and firms are advised to use the same approach to interpreting whether the consumer credit activities are incidental. This guidance refers to the fact that it is the sum of the parts that is important and that it is clear that the firm is providing other professional services and that the provision of the consumer credit activities are not isolated from the firm's other activities such that there is, in effect, a separate business. What is Consumer Credit/Entering a regulated credit agreement A consumer credit agreement is an agreement between an individual (the debtor) and any other person (the creditor) by which the creditor provides the debtor with credit of any amount. This includes:

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hire purchase

issuing credit cards

budget accounts

installment credit

cash loans

overdrafts

personal loans

pawnbroking

payday loans

bridging loans

shared equity loans. The most common activity in this category for our firms, and the only one likely to be in the DPB scheme, is firms allowing clients to pay fees by instalment as this is one of the few times most firms are acting as the creditor. Please note that under the Regulated Activities Order if the instalment arrangement is for 4 or fewer payments over a 12 month period and no interest is charged, this is not consumer credit (e.g. quarterly payment of fees). Otherwise it is a consumer credit activity, albeit it may fall within the incidentality conditions of the Part 20 regime. Are there any exemptions from needing a licence? One of the most common activities is firms allowing clients to pay fees by instalment. Under the Regulated Activities Order if the instalment arrangement is for 4 or fewer payments over a 12 month period and no interest is charged, this is not consumer credit (e.g. quarterly payment of fees). Otherwise it is a consumer credit activity, albeit it may fall within the incidentality conditions of the Part 20 regime. What about normal standing order/payment instalment arrangements where effectively some of the firms fees are taken before the service is provided? Some fee payment arrangements, such as paying fees by standing order or BACs monthly, may results in a mix of fees paid in arrears and in advance. Payments in advance are not consumer credit but if some of the payments are in arrears the arrears part is. If the payment instalments are less than four a year this is exempt, if it more than four it could be covered under the DPB scheme if incidental, or an FCA licence, if not What is credit brokerage? You may not actually offer to lend money from your own funds but if you introduce any individual to a third party so that they can obtain credit then this is credit brokerage. Most firms actively involved in financial services conduct this activity. An introduction does not depend upon the forwarding of the application to the lender. It also applies to a recommendation to deal with a particular lender. It is also credit brokerage to introduce people to other credit brokers. This does not include where you are simply going to accept credit cards issued by someone else Firms are most typically involved in this activity if they refer clients to Premium Credit for the payment of fees. This is a consumer credit activity. However it may still meet the incidentality conditions of the Part 20 DPB regime. If you have already introduced all of your clients before 1 April 2013 and are not introducing any further clients, this is not an consumer credit activity it is the activity of introduction/referral that is the consumer credit activity (i.e. past introductions under the group consumer licence dont need to be considered). What is debt adjusting? This includes

negotiating terms with the creditor on behalf of an individual for the discharge of a debt, or

taking over, in return for payments by the debtor, his obligation to discharge a debt, or

engaging in any similar activity concerned with the discharging of a debt.

If a customer has existing debts, before you lend or broker additional funds you may undertake to adjust the existing debts owed by the customer. If you simply offer to negotiate with creditors on someone's behalf you are conducting this activity.

What is debt counselling? This is providing debt advice to a borrower about the liquidation of a debt due under a consumer credit or consumer hire agreement. Prioritising payment of one debt over another is likely to be debt counselling.

What is debt administration? Debt administration is where you take steps to:

perform duties under a consumer credit agreement or a consumer hire agreement on behalf of a creditor or owner, or

exercise or to enforce rights under such an agreement on behalf of a creditor or owner so far as the taking of such steps is not debt-collecting.

This does not include if you are acting in your own interest, for example administering loans where you are a creditor or owner. This activity may include for example, some peer-to-peer lending platforms and includes activities such as ensuring relevant documentary information and credit agreements comply with, and are completed in accordance with, relevant legal requirements.

What is credit information services (including credit repair)? This activity includes:

seeking to obtain information on behalf of an individual about his financial standing (for example credit rating information), including asking a credit reference agency if it holds the information

provide advice to individuals on: o how to seek to alter, or secure the omission of, the information; o how to seek to restrict the availability of the information;

seek to alter, or secure the omission of, information about an individual's financial standing;

seek to restrict the availability of the information.

This does not include a request for changes to your own personal information. Also, if you are simply seeking information about an individual's creditworthiness, on your own behalf, then you do not need a licence just for this. It is not a consumer credit activity if you simply direct customers to free information that is publicly available, for example signposting customers to the Information Commissioner's website.

What is consumer hire? This activity includes hiring, renting out, or leasing goods under any regulated agreements, and where the arrangement is capable of lasting for more than three months. In such cases the ownership of the goods or services being hired does not transfer to the consumer. An example would be a rental package for TV, phone and broadband, but not a hire purchase agreement. (This activity also includes any debts purchased arising from regulated consumer hire agreements). What is debt collecting? This activity includes all steps connected with the collecting of debts owed to others under any regulated consumer credit or hire agreements and you can simply be collecting those debts on the third party's behalf. This activity does not include the collection of debts owed to you from consumer credit or hire agreements (including those which become owing to you, for example, after debt purchase).

Under the new regime, provided a firm is not the lender or owner, and simply takes steps to trace the identity or location of a borrower or hirer under an outsourcing arrangement and takes no other steps to collect debts, it will be exempt from having to be licensed for debt collection.

What is a credit reference agency?

The new activity only applies to a firm if its business primarily consists of providing others with information relevant to someone's financial standing and collecting such information for that purpose. Consequently, only firms whose main business activity is being a credit reference agency are likely to meet the criteria to hold a permission for this activity. Peer to peer lending (P2P) The FCA plans to introduce a new category of credit activity to cover peer to peer lending. The actual regulated activity is operating an electronic system in relation to lending this is the system that matches up potential borrowers with others who have funds available for lending. The new credit activity for P2P platforms will cover their operation of the electronic platform, as well as other activities they do connected to that. For more information on PRP lending see the FCA website: Will I need to change my business model? A number of firms may require to consider their business model as a result of these changes. If, for example, a small part of your business is involved in non incidental consumer credit activities, but the rest of your practice is not, you may consider setting up the non incidental part as a separate entity so only that entity needs authorised by the FCA, whilst the rest of the practice can be covered by the DPB scheme. It is for your firm to consider the most appropriate model for your business activities. This is similar to when the Financial Services and Markets Act came into effect, a number of firms, for example, hived off their financial services businesses into a separate entity so that only it required FCA authorisation. What about fee protection schemes? Does this have consumer credit implications? The guidance about what a firm can and cant do in relation to fee protection insurance is covered within the DPB Handbook and is not relevant to consumer credit. Although you should remember that if any clients are making payments by instalment towards the scheme this could potentially be caught as entering a regulated credit agreement.

What about normal debt per engagement terms e.g. 30 days to pay? Normal trade credit is not consumer credit and it is likely that allowing additional time to pay is also. However if you have your client enter into an instalment agreement to settle the bill, this is caught under a regulated credit agreement.