HM Treasury (HMT) and the Department of Trade and Industry (DTI) have published an informal discussion paper and proposed Statutory Instrument (SI) to address industry concerns over dual regulation of certain credit agreements under both the Consumer Credit Act (CCA) and Financial Services and Markets Act (FSMA). This paper follows discussions between HMT, DTI, FSA and the Office of Fair Trading. The paper addresses two particular situations where there is potential for regulatory overlap – modified agreements and credit brokerage.
Under section 82 of the CCA where an existing credit agreement is varied or supplemented by a new contract the existing credit agreement and the later modifying agreement are to be treated as one combined agreement. Further, if the existing credit agreement is regulated, then the modifying agreement is to be treated as a regulated agreement.
Since the introduction of mortgage regulation in October 2004 the possibility has arisen that changes to an existing credit agreement, such as making a further advance, could amount to entry into a Regulated Mortgage Contract (RMC) so that the modifying agreement is regulated under CCA as well as FSMA. This meant that certain agreements could be subject to both regulatory regimes with the problem likely to increase when, as is planned, the Consumer Credit Bill brings all consumer credit within the scope of the CCA, subject to limited exemptions, by removing the £25,000 upper limit for regulation.
The proposed SI has been drafted to amend section 82 of the CCA so that the RMC is subject to FSMA and the original agreement remains under the jurisdiction of the CCA, thus having the effect of ensuring that the two agreements will be treated as separate and distinct, rather than being combined into a single agreement.
Firms will then be required to comply with the relevant regulatory regime for each agreement so that the Initial Disclosure Documents, Key Facts Illustrations and offer documents need to be provided for the new RMC, and if the original loan is already regulated under the CCA, annual statements, default notices and early settlement will continue to be required for the original agreement.
It was the intention of the Regulated Activities Order (RAO) introduced under FSMA that changes be made to CCA so that mortgage arrangers, debt-adjusters and debt-counsellors ("introducers") would not need a CCA licence to effect introductions where the mortgage contract is a RMC.
However, the activity to be excluded was defined by reference to the definition of a "consumer credit agreement". This meant introducers would require a CCA licence if the value of the credit exceeded £25,000. Whilst the provisions of the Consumer Credit Bill are likely to resolve this issue the government has decided to amend s146 CCA so that brokerage activity is no longer tied to the definition of a "consumer credit agreement" and therefore achieve the original intention of the RAO in the short term.
The paper calls for responses from industry on the discussion paper and draft SI by 30 September. Following responses it is proposed that the SI introducing the changes be passed in Autumn 2005.