Closed Consultation

Consultation - regulation of consumer credit activities and SRA's role and obligations as a Designated Professional Body

The SRA is an independent regulator of legal services providers in England and Wales. This consultation has been published in order to seek the views of our stakeholders, including those we regulate, consumers and their representatives.

Background

• 1.

  This consultation invites views on our proposals 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). In summary, following changes which took effect on 1 April 2014, FSMA prescribes that certain consumer credit activities must be regulated. These activities include credit broking, debt adjusting and debt counselling ¹. From that date, regulation of consumer credit activities transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA). Under Part 20 members of a "Designated Professional Body" (DPB), 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.

• 2.

  This consultation follows an earlier consultation in October 2014 in which we sought views on whether to withdraw from the Part 20 regime in relation to the regulation of consumer credit activities ². Following that consultation, we decided that there was benefit in us remaining within the Part 20 regime and we have engaged with the FCA in developing proposals for proportionate regulatory arrangements to allow us to do so. Under Part 20, we are required to make rules which govern the provision of consumer credit activities, which must be approved by the FCA and the Legal Services Board (LSB). These must be in place by the time the existing transitional provisions expire ³. The FCA has recently extended these provisions until April 2016, on the understanding that we will publish our final regulatory arrangements in November 2015.

• 3.

  This consultation is seeking responses to our proposed new regulatory requirements governing those activities which we consider should remain with the SRA (set out in amendments to the SRA Financial Services (Conduct of Business) Rules 2001 (the Conduct of Business Rules) and the SRA Code of Conduct 2011 (the Code)) as well as our proposals for those activities for which we suggest FCA authorisation should be required (set out in amendments to the SRA Financial Services (Scope) Rules 2001 (the Scope Rules)). We would welcome views of solicitors and firms on the likely impact of our proposals on their practice, and to hear views about the impact of our requirements on consumers.

Scope of regulation

Exclusions and exemptions

• 4.

  As stated in our October 2014 consumer credit consultation paper, we have worked closely with HM Treasury and the FCA to secure an extension to some of the existing exclusions which narrow the scope of the activities which require regulation under FSMA.

• 5.

  We have been successful in doing so: Firstly, the "contentious business" exclusion in the Financial Services and Markets Act 2000 (Regulated Activities) Order (RAO) has been extended, via the Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2015 (SI 2015/853) which came into force on 24 March 2015, to cover work carried out prior to issue of, and/or in contemplation of proceedings. This will allow certain consumer credit activities, such as debt collecting, to be excluded from regulation under FSMA 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.

• 6.

  In addition, the exemption in article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) has been amended by the Financial Services and Markets Act 2000 (Miscellaneous Provisions) (No 2) Order 2015 (SI 2015/352).to increase the number of instalments over which services/transactions can be financed. With effect from 18 March 2015, the number of instalments that fall within the exemption increased from four to twelve.

• 7.

  As the legislative changes were not retrospective, arrangements entered into before 18 March 2015 remained regulated under the previous provisions. You can access further information about these legislative changes on our website.

Scope of Part 20 and proposed prohibitions

• 8.

  Under Part 20, consumer credit activities may only be carried out under SRA regulation where the services are provided in a manner which is incidental to the provision of legal services (s327(4) of FSMA) and, in relation to the provision of a particular professional (legal) service to a particular client, the activity arises out of, or is complementary to that service (s332(4) of FSMA).

• 9.

  Our overarching aim is to ensure that firms can continue, under SRA regulation, to undertake the consumer credit activities that are, in line with the scope of Part 20, ancillary to their legal practice. Further, we would like to provide clarity around the kinds of activities which we believe are distinct and specialist consumer credit services that should be regulated by the FCA, as the specialist financial services regulator with the appropriate experience and expertise. Providing a clearly defined list of prohibited activities also enables us to adopt a streamlined and proportionate set of regulatory requirements, focussed on what is required to ensure consumers are appropriately protected in relation to those activities which we believe are related to the practice of law.

• 10.

  Therefore, we propose to amend the Scope Rules to prohibit those we regulate 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 the payment of 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 the payment of 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 (or exercising or having the right to exercise rights and duties under) a peer to peer lending agreement.
   
• 11.

  It is proposed that restrictions will apply to firms carrying on permitted consumer credit activities. These restrictions 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 (pawn broking)
  • 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, the aim of which 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, or attributing any element of the firm's fees to, the provision of credit broking services.

  The proposed changes to the Scope Rules are set out in Annex 1.

• 12.

  Our initial discussions with stakeholders have indicated that it is uncommon for firms to undertake the activities listed above, unless conducting business which requires separate authorisation with the FCA. However, we have not to date collected targeted information from those we regulate about the consumer credit activities that they carry out, and those for which they have sought FCA authorisation to date. Therefore we are particularly keen to seek information as part of this consultation regarding whether stakeholders agree with our assumptions in this respect. If we are prohibiting activities that fall into the above category, and this is likely to have a detrimental impact on firms and consumers, please do let us know and provide details of any additional protections that you believe would be appropriate to put in place in light of any risks these activities may present. We will review the proposals, and the list of proposed prohibitions, in light of this information.

• 13.

  We are aware that certain arrangements with regards to the payment of professional fees might include the taking of security for credit arrangements (for example, in family matters). We have taken these type of arrangements into account when drafting our proposals and tried to ensure that they will be permitted; in particular there is a restriction on credit secured on land but this only applies where the land is secured by way of a legal or equitable mortgage. We would welcome any views on this subject, including the likely impact of the prohibitions and restrictions as currently worded on firms and their clients. We would propose to adjust the prohibitions and restrictions if it appears that our proposals would not allow these arrangements to continue.

• 14.

  We would like to hear whether any firms currently charge fees for or gain profit from credit broking services and, if so, what form these fees or other arrangements take ⁴. We would also welcome views on the likely impact of the proposed restrictions around credit broking fees as currently worded on firms and their clients.

Proposed changes to the Conduct of Business Rules, the Code and the SRA Handbook Glossary 2012

• 15.

  We have striven to ensure that any changes to our rules in relation to the carrying on of permitted consumer credit activities are made only where necessary and wherever possible avoid unnecessary duplication of existing SRA requirements. Our existing regulatory framework is designed to ensure high standards of competence and professionalism, and incorporates stringent qualification and authorisation requirements for entry to the profession, and robust enforcement powers to ensure our standards are maintained. In relation to consumer credit activities, the FCA's approval criteria require us to develop rules which are equivalent to those within the FCA's Consumer Credit sourcebook (CONC). We have mapped our existing principles and outcomes against the relevant provisions in CONC, and propose to issue guidance to explain how these apply to the provision of consumer credit activities and are, in that context, equivalent to CONC.

• 16.

  However, there are some areas in which new rules are required in order to achieve the appropriate levels of consumer protection as set out in CONC, or as a result of requirements prescribed in legislation such as the Consumer Credit Directive (2008/48/EC).

• 17.

  In summary, we propose amending our Conduct of Business Rules to include certain requirements intended to ensure that firms:

  • communicate effectively, in a manner which is fair and transparent;
  • before entering into or proposing a regulated credit agreement, appropriately assess clients' creditworthiness, and provide clients with adequate explanations to enable them to make informed decisions;
  • ensure transparency when engaging with third parties and when assigning rights under an agreement; and
  • provide clients with a degree of flexibility with regards to payments due in respect of two or more credit agreements.
   
• 18.

  We are proposing a change to the Code to include 'regulated credit agreements' under the requirements set out in indicative behaviour 6.1 which provide that introductions to third parties will only be made where in the best interests of the particular client and the agreement is suitable for the needs of that client.

• 19.

  Finally, we have introduced new defined terms into the SRA Handbook Glossary 2012. The majority of the defined terms have been taken from the FCA Handbook Glossary and adapted where necessary.

• 20.

  The proposed changes to the Conduct of Business Rules, the Code and the SRA Handbook Glossary 2012 are set out in Annex 1.

• 21.

  It is our intention to develop guidance that will complement these changes to help provide clarity for firms and provide illustrative examples of practices/behaviours that we consider would comprise a breach of the Principles or a failure to achieve the Outcomes in relation to consumer credit activities. Our Professional Ethics Helpline (including the dedicated service for small firms) will also be available to help firms comply with our new regulatory requirements. This is likely to be supplemented with a frequently asked questions document, case studies and/or questions of ethics to help firms make the transition to the new arrangements.

• 22.

  We are aware that the FCA may review and change parts of CONC from time to time, for example in light of the wider review of the FCA's approach to unfair contract terms ⁵. We will consider the implications on our rules and guidance of any such changes to CONC on an on-going basis.

Impacts of proposals

• 23.

  As stated earlier, we have not to date collected from SRA-authorised firms specific information about the consumer credit activities they carry out that could help measure the impacts of these proposals.

• 24.

  Overall we consider that the proposals are likely to have a positive impact on both consumers and SRA-authorised firms. The proposals provide equivalent consumer protections to those set out in CONC but are targeted at those activities that we understand firms engage in as part of their legal practice. Wherever possible the proposals apply existing principles and outcomes from the SRA handbook. This provides an intuitive and proportionate regime for those whose business is primarily involved in the provision of legal services.

• 25.

  In response to our previous consultation it was suggested that some firms, and particularly smaller firms/sole practitioners, may be forced out of the market due to the costs of dual regulation. We consider that our proposed approach minimises this risk by permitting firms to continue to undertake, under SRA regulation, consumer credit activities that naturally form part of their legal practice and to continue to provide benefits to consumers, such as deferred payment arrangements, under a streamlined scheme. We consider that the proposed prohibitions, together with minimal additional requirements supported by illustrative guidance, provide a proportionate and targeted approach to regulation whilst providing appropriate consumer protection. We will continue to work with the Sole Practitioners Group and other representative groups to seek views and opinions.

• 26.

  The biggest impact is likely to stem from the prohibitions and restrictions listed in paragraphs 10 and 11. This is particularly so as SRA-authorised firms authorised by the FCA to carry on consumer credit activities will no longer be able to benefit from the Part 20 regime in relation to any other FSMA regulated activities (for example, insurance mediation activities). This is because a firm cannot be both authorised by the FCA and carry on exempt regulated activities under Part 20 at the same time.

• 27.

  However, it is worth noting that if we permitted firms to carry out the activities listed in paragraphs 10 and 11, we would need to ensure that appropriate amendments to our Handbook were made in order to provide equivalent regulatory requirements to those set out in CONC. This could only be achieved by incorporating CONC, or substantial parts of it, into the SRA's rules. Therefore those very detailed and prescriptive requirements would nonetheless apply to firms, and this would go against the SRA's direction of travel towards a more flexible Handbook.

• 28.

  If following this consultation we decide to implement the regulatory scheme going forward we will look to collect better data to review the operation of the scheme and its impacts. This will result in a higher reporting burden on firms. Improved data collection will help better assess the impact of our regulatory arrangements going forward.

Next steps and implementation timetable

• 29.

  This formal consultation is open for six weeks, closing on Friday 7 August 2015.

• 30.

  As previously mentioned, we have already engaged informally with a number of firms and other key stakeholders in developing these proposals. For example, we sought early feedback from the small firms virtual reference group, we have invited views at Law Society events and we have spoken to firms that we know undertake consumer credit work. We have also been guided by responses to the October 2014 consultation.

• 31.

  In line with our published consultation policy, we will pro-actively target and facilitate discussion with key stakeholders, including firms likely to be affected by these proposals. For example, we will hold an open webinar where participants can raise questions and express views.

• 32.

  We aim, subject to FCA and LSB approval, to publish our final regulatory arrangements in November 2015, but these will not take effect until April 2016. This will allow for smooth transition, including providing opportunity to firms who wish to get approval from the FCA to do so, for example those currently undertaking activities that we propose to prohibit from our regime. The FCA has agreed this extension to the transitional period. During this transitional period, all SRA- authorised firms undertaking consumer credit activities under the Part 20 exemption must comply with the SRA's transitional provisions. These provisions require such firms to comply with the legislation and OFT guidance in place immediately before 1 April 2014.

• 33.

  Our forward timetable is set out below:
  
  

  Formal consultation on our proposals	26 June to 7 August 2015
  SRA Consumer Credit webinar	16 July 2015
  Rule changes to be made by the SRA Board	9 September 2015
  Changes to the SRA's regulatory arrangements approved by the FCA and the LSB	October 2015
  Publication of rules on SRA website	1 November 2015
  End of transitional arrangements	31 March 2016
  Rules including prohibitions come into effect	1 April 2016

   

To help respondents formulate their response to the questions set out above, a set of questions and answers have been produced and are set out in Annex 2.

Annex 1 - Draft changes to rules in the SRA handbook

SRA Financial Services (Scope) Rules 2001

Rule 3: Prohibited activities

5.11

Credit-related regulated activities

(a)

Where a firm carries on a credit-related regulated activity or a connected activity it must comply with the provisions and guidance set out in Rule 1.3R of the transitional provisions in the FCA'sCONC as they were in force immediately before 1 April 2014 in relation to that activity, with any appropriate modification to take into account the coming into force of HM Treasury Orders that give effect to the transfer of consumer credit regulation from the OFT to the FCA.¹

(a)

A firm must not enter into any transaction with a client in which it:

(i)

provides 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;

(ii)

holds a continuous payment authority over the client's account; or

(iii)

takes any article from the client in pledge or pawn as security for the transaction.

(b)

A firm must not enter into a regulated credit agreement as lender which is secured on land by a legal or equitable mortgage.

(c)

A firm must not enter into a regulated credit agreement, as lender, which includes a variable rate of interest.

(d)

A firm must not provide a debt management plan to a client.

(e)

A firm must not charge a separate fee for, or attribute any element of the firm's fees to, the arrangement or administration of credit broking services.

Note

(i)

A firm which relies on the Part XX exemption cannot carry on insurance mediation activities unless they are on the FCA's Exempt Professional Firms (EPF) Register and appoint an insurance mediation officer. Firms wishing to be on this Register should notify the SRA and provide details of their insurance mediation officer. The EPF Register can be accessed on the FCA website - see www.fca.org.uk.

(ii)

During the transitional period between 1 April 2014 and 31 October 2015², firms carrying on credit-related regulated activities will be required to comply with the guidance and other provisions listed in the transitional provisions in the FCA'sCONC. These provisions should not impose any new obligations as firms should already be complying with them but firms will need to adopt a common sense approach in interpreting them, for example, references to the OFT in these provisions and guidance should be read as if they referred to the FCA and references to the relevant supervisory authority mean the SRA.

SRA Financial Services (Conduct of Business) Rules 2001

Rule 9A: Credit-related regulated activities

1.

Where a firm undertakes credit-related regulated activities, it must comply with appendix 2 to these rules.

Part 2: APPENDIX

APPENDIX 2: Credit-related Regulated Activities

1.

Disclosure of information

(a)

Where a firm undertakes credit-related regulated activities for a client, it must ensure that information in relation to such activities is communicated to the client in a way that is clear, fair and not misleading.

(b)

Where a firm carries on the activity of credit broking, it must indicate in any advertising and documentation intended for consumers or clients the extent and scope of its credit broking activities, in particular whether the firm works exclusively with one or more lenders or as an independent broker.

2.

Regulated credit agreements

(a)

Where a firm carries on a credit-related regulated activity involving a proposed regulated credit agreement, it must provide adequate explanations to the client in order to enable the client to assess whether the proposed regulated credit agreement is suitable to the client's needs and financial situation.

(b)

Before entering into a regulated credit agreement as lender, the firm must assess the client's creditworthiness on the basis of sufficient information to enable the firm to make the assessment, where appropriate such information will be obtained from the client and, where necessary, from a credit reference agency.

(c)

After entering into a regulated credit agreement where a firm is the lender, if the parties agree to change the total amount of credit, the firm must update the financial information the firm holds concerning the client and assess the client's creditworthiness before any significant increase in the total amount of credit.

(d)

In the event of a firm assigning to a third party its rights as lender in relation to a regulated credit agreement, the firm must inform the client of the assignment.

3.

Appropriation of payments

Where a firm is entitled to payments from the same client in respect of two or more regulated credit agreements, the firm must allow the client to put any payments made, in respect of those agreements, towards the satisfaction of the sum due under any one or more of the agreements in such proportions as the client thinks fit.

SRA Code of Conduct 2011

Chapter 6: Your client and introductions to third parties

Indicative behaviours

IB(6.1)

any arrangement you enter into in respect of regulated mortgage contracts, regulated credit agreements, general insurance contracts (including after the event insurance) or pure protection contracts, provides that referrals will only be made where this is in the best interests of the particular client and the contract or agreement is suitable for the needs of that client;

SRA HANDBOOK GLOSSARY 2012

New defined terms

The majority of these terms have been taken from the FCA Handbook Glossary and adapted where necessary.

 

 

 

 

 

 

continuous payment authority

means consent given by a client for a firm to make one or more requests to a payment service provider for one or more payments from the client's payment account, but excluding:,

(a)

a direct debit to which the Direct Debit guarantee applies; and

(b)

separate consent given by a client to a firm, following the making of the regulated credit agreement, for the firm to make a single request to a payment service provider for one payment of a specified amount from the client's payment account on the same day as the consent is given or on a specified day.

credit broking

means an activity of the kind specified in article 36A of the Regulated Activities Order.

credit token

means a card, check, voucher, coupon, stamp, form, booklet or other document or thing given to a client by a person carrying on a credit-related regulated activity ("the provider"), who undertakes that:

(a)

on production of it (whether or not some other action is also required) the provider will supply cash, goods or services (or any of them) on credit; or

(b)

where, on the production of it to a third party (whether or not any other action is also required), the third party supplies cash, goods and services (or any of them), the provider will pay the third party for them (whether or not deducting any discount or commission), in return for payment to the provider by the client and the provider shall, without prejudice to the definition of credit, be taken to provide credit drawn on whenever a third party supplies the client with cash, goods or services; and

the use of an object to operate a machine provided by the person giving the object or a third party shall be treated as the production of the object to that person or third party.

debt management plan

means a non-statutory agreement between a client and one or more of the client's lenders the aim of which is to discharge or liquidate the client's debts, by making regular payments to a third party which administers the plan and distributes the money to the lenders.

high-cost short term credit

means a regulated credit agreement:

(a)

which is a borrower-lender agreement or a P2P agreement;

(b)

in relation to which the APR is equal to or exceeds 100%;

(c)

either:

(i)

in relation to which a financial promotion indicates (by express words or otherwise) that the credit is to be provided for any period up to a maximum of 12 months or otherwise indicates (by express words or otherwise) that the credit is to be provided for a short term; or

(ii)

under which the credit is due to be repaid or substantially repaid within a maximum of 12 months of the date on which the credit is advanced;

(d)

which is not secured by a mortgage, charge or pledge; and

(e)

which is not:

(i)

a credit agreement in relation to which the lender is a community finance organisation; or

(ii)

a home credit loan agreement, a bill of sale loan agreement or a borrower-lender agreement enabling a borrower to overdraw on a current account or arising where the holder of a current account overdraws on the account without a pre-arranged overdraft or exceeds a pre-arranged overdraft limit.

legal or equitable mortgage

includes a legal or equitable charge and, in Scotland, a heritable security.

pawn

means any article subject to a pledge.

pawnee

means a person who takes any article in pawn and includes any person to whom the rights and duties of the original pawnee have passed by assignment or operation of law.

pledge

pawnee's rights over an article taken in pawn.

regulated credit agreement

has the meaning given by article 60B(3) of the Regulated Activities Order.

regulated consumer hire agreement

has the meaning given by article 60N(3) of the Regulated Activities Order.

running account credit

means a facility under a credit agreement under which the borrower or another person is enabled to receive from time to time from the lender, or a third party, cash, goods or services to an amount or value such that, taking into account payments made by or to the credit of the borrower, the credit limit (if any) is not at any time exceeded.

Annex 2 - Questions and answers to support consumer credit consultation

Updated 22 July 2015

These questions and answers will be updated during the consultation period as we receive new queries on our proposals. Please let us know if you have any questions that you would like to be included in this section.

You can also access questions and answers published previously in relation to consumer credit activities.

Scope and overview

Q - What are regulated consumer credit activities?

Q - In what circumstances can an SRA-authorised firm carry out regulated consumer credit activities?

Q - What conditions have to be satisfied in order to rely on Part 20?

Q - Are the services being provided in an "incidental manner"

Prohibitions and restrictions in paragraphs 10 and 11 of this consultation

Q - What is a regulated credit agreement?

Q - Will the restriction relating to 'pawn broking' impact on circumstances when a lien is exercised over client files/assets?

Q - Are conditional fee agreements, and the use of, impacted in any way?

Q - Is the holding of a continuous payment authority prohibited absolutely or only when used in relation to a regulated credit agreement?

Q - When acting as lender under a regulated credit agreement which relates to the payment of disbursements or professional fees can the firm charge the client a variable rate of interest?

Q - Will the use of a Sears Tooth agreements, which in effect provides for security for a credit arrangement concerning fees, be allowed under the proposed regulatory arrangements?

Q - Is a loan to a business partner to buy into a partnership included in the scope of the proposed prohibitions?

Q – Will firms be able to offer bridging loans to clients where there is a shortage of funds just before completion of a purchase?

Q – How will the proposals impact on the ability of a firm to obtain security for its costs by means of a legal or equitable charge?

Q –Do the proposals impact on us when we refer clients to a third party to obtain credit?