Consumer Credit Update for Motor Finance Firms


Scope of the limited permission regime

Debt counselling and debt-adjusting

The FSA’s original list of “lower-risk” and “higher-risk activities” in CP13/07 included debt counselling and debt-adjusting among the latter. This caused concern among motor dealers holding Category D and E consumer credit licences. However the FCA has confirmed that debt-adjusting and debt counselling will be limited permission activity when carried on in connection with the main business of selling motor cars, and alongside the (also limited permission) activity of secondary credit broking for that purpose.

Insurance broking and other non-consumer credit authorised activities

Unfortunately, the FCA has also confirmed that a motor dealer directly authorised for the activity of insurance broking will not be eligible for the limited permission regime. This dealer would have to apply for full authorisation. (Note that a motor dealer carrying on insurance broking as an Appointed Representative would still be eligible for limited permission, however.)

The Finance and Leasing Association (FLA) has raised this issue in their response to FCA CP13/10. However it appears that any change would have to be legislative, and this is not a question of interpretation.

Status disclosure requirements

The original March 2013 FSA consultation paper proposed that firms should be required to disclose whether they hold interim permission, limited permission, or full authorisation, on every letter (or “electronic equivalent”). Crucially, this would include the SECCI and credit agreements. Under other the Consumer Credit Act, where a SECCI or regulated credit agreement are incomplete, they are unenforceable except on an order of the court.

If the March 2013 proposals had been adopted, it would have meant that firms would have had to have changed all their stationery twice: once just before 1 April 2014, to disclose that they held interim permission from this date, and once again when they finally obtained limited permission or full authorisation.

However, the FCA has confirmed that consumer credit firms would not have to disclose whether they have interim or limited permission; instead, “the standard rule in GEN 4.3 will apply from 1 April 2014”. Under this rule, a consumer credit firm[1] will have to state that it is “Authorised and regulated by the Financial Conduct Authority”.

Concerns remain, however, over the precise logistics of how GEN 4.3 will begin to apply – whether firms will be required to change their stationery literally overnight, or whether some longer-term changeover will be permitted. The FLA, in its response to the previous FCA consultation, has suggested a three-month transition period.

Compliance by agents

One rule in the new FCA consumer credit sourcebook (CONC) states that “a firm must ensure that employees and agents or other persons acting on its behalf comply with [the consumer credit sourcebook].” (CONC 1.2.2).

Does this mean that motor finance firms must ensure the regulatory compliance of the brokers who work with them – similar to present arrangements between Principals and Appointed Representatives? If this were to be the case, it would effectively blur the difference between agents and Appointed Representatives; it might also be considered somewhat excessive, as brokers would necessarily be authorised themselves under the new system in any case.

At common law[2], a motor dealer is, in general, not the agent of a finance company but acts on his own behalf. One particular exception to the rule was created by s.56 of the Consumer Credit Act (‘CCA’), which provides that a dealer is to be considered an agent for the (rather limited) purpose of antecedent negotiations to a consumer credit contract.

It appears unlikely that the FCA intends to extend the definition of “agency” beyond the common law and the CCA; it is more unlikely still that CONC 1.2.2 is intended to impose Principal-and-Appointed Representative-style oversight of intermediaries who will be FCA authorised themselves anyway.

The FLA, in their response to CP13/10, have raised the above concerns over CONC 1.2.2, arguing that the provision should be limited to employees and agents, and exclude intermediaries and the broad category “other persons”.

Forbearance and modified agreements

CONC 6.7.19 and 7.1.1-20 contain the new rules on refinancing and forbearance. These are based on (but not identical with) the old OFT Irresponsible Lending Guidance and Debt Collection Guidance (‘DCG’).

CONC 6 mostly concerns high-cost short-term credit, and 6.7.19 is expressly limited to refinancing arrangements other than forbearance. (In any case, the common law concludes that non-contractual forbearance does not amount to a ‘modified agreement’ under s.82 CCA.)

Concerns have been raised over the practical impact of these rules. Will they need to be more flexible? Will they be obliged always to negotiate with a borrower over a modified agreement (CONC 7.3.9)? What about the situation where finance is secured on a depreciating asset – and so where the lender wants to repossess that asset as soon as possible, rather than spending time (re)negotiating? Would repossessing a car be “pressuris[ing]” a customer (CONC 7.3.10)?

Existing rule (3.9d DCG)

Examples of unfair or improper practices are as follows:

(d) contacting debtors directly and bypassing their appointed representatives, without permission from the debtor or his representative, unless there is an objectively justifiable reason for doing so […]

Operating a policy of refusing to negotiate with certain third party representatives or with a debtor developing his own repayment plan would not, in the OFT's view, constitute an 'objectively justifiable basis' in this context.

Corresponding new rule (CONC 7.3.9)

A firm must not refuse to negotiate with a customer who is developing a repayment plan.

In reality, CONC is unlikely to represent a drastic change to how things are currently done in practice. It should also be remembered that there will be a six-month transitional period beginning on 1 April 2014, during which the FCA will not take action against any breaches of the new rules where a firm is able to demonstrate that it has complied with the old CCA requirements and OFT guidance. Over this period it is to be hoped that the FCA’s approach will become much clearer.

Category G licences and ‘operating an electronic platform’

The FCA have proposed to create a new regulated activity of ‘operating an electronic platform in relation to lending’. It is very clear that this “activity is aimed at what are sometimes referred to as peer-to-peer lending platforms” (from the FCA’s perimeter guidance); and every time the activity is mentioned in the FCA’s recent consultation paper CP13/10, for example, it is always in the context of peer-to-peer lending.

Unfortunately, the activity has a rather complicated definition, and – based on the strict wording – is likely to encompass some of the activities currently carried out by motor finance brokers.

Furthermore, there is an element of urgency to these concerns, as the FCA has made clear that any firm that wishes to carry on the activity of ‘operating an electronic platform in relation to lending’ period during the interim period – which begins on 1 April 2014 – must obtain a Category G (Debt Administration) consumer credit licence as soon as possible. Any firm which needs to operate an electronic platform after 1 April 2014, but which did not hold a Category G licence before then will lose out on the option of obtaining interim permission, and will have to go through the (much more onerous) process of obtaining limited permission or full authorisation instead.

As of the time of writing, the FLA is in discussions with HM Treasury over changing the definition of ‘operating an electronic platform in relation to lending’ so that it is expressly limited to a situation in which the operator (a) makes and receives payments of interest and capital between the parties under the agreement, and also (b) undertakes to take steps to procure payment of the debt due, or otherwise exercise or enforce rights under the agreement.

In any case, it would appear unlikely that the regulators would take action against motor dealers using electronic systems in the course of their business, given the FCA’s expressed intentions as to the purpose of the legislation described above.

[1] Unless it is already regulated by the Prudential Regulation Authority; or an Appointed Representative; or a firm on an EU passport.

[2] Branwhite v Worcester Works Finance Ltd [1968] 2 All ER 104