Offering customers credit is a regulated activity in the UK. Companies must be authorised by the Financial Conduct Authority (FCA) and show that they meet the FCA’s minimum standards to be authorised. This includes ensuring your firm has a suitable business model and is well run by ‘fit and proper’ people.
Any business offering credit or financing to customers must be authorised by FCA, not just credit specialist companies. This includes non-profit organisations.
In this article we look at which activities require authorisation, and which are exempt. For example, what happens if you only lend to other businesses or use a third party BNPL provider?
If you’re unsure whether consumer credit regulations will affect your business or would like to seek discrete advice on compliance, our consumer credit experts can help.
- I want to offer my customers credit; do I need to be regulated?
- What is credit?
- What are the regulated activities?
- Are there any exemptions?
- What about business to business lending?
- What if I use a third party BNPL provider to provide credit, such as Klarna or Clearpay?
- Does this make me a credit broker?
- Are there ongoing considerations I should be aware of?
I want to offer my customers credit; do I need to be regulated?
You must be authorised by the Financial Conduct Authority (FCA) to offer credit to consumers.
Offering consumers credit includes:
- Selling goods or services on credit (including hire purchase)
- Hiring or leasing out goods for more than 3 months
- Lending money
- Issuing credit cards
- Arranging credit for other people
- Collecting or purchasing consumer credit debts
- Helping people with debt problems or advising on people’s credit standing
The definition of a regulated credit agreement is set out in article 60B of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (‘RAO’). Those wishing to carry out credit activities that involve a regulated credit agreement must be authorised by the FCA unless they fall within an exclusion under the RAO.
What is credit?
Article 60L of the RAO defines credit as:
Credit includes a cash loan and any other form of financial accommodation.
Over the years, the courts have held that the elements of credit include:
- Attracting a contractual duty of payment
- The supply of a benefit
- The supply is in money
- The duty to pay being contractually deferred by a significant period of time
What are the regulated activities?
Under FSMA, a person must not carry on a regulated activity in the UK unless they are authorised or an exempt person. A regulated activity is a specified activity carried on by way of business in the UK.
In the context of credit-related activities, this includes:
- Carrying on credit broking activity
- Carrying on debt-related regulated activities
- Entering into a regulated agreement as a lender
Are there any exemptions?
There are a limited number of exemptions from regulation for consumer credit agreements. These include agreements entered into by a borrower that is not within the statutory definition of an individual or certain prescribed exempt agreements.
Exempt agreements include:
- The purchase of land for non-residential purposes
- Agreements with local authorities and investment firms
- Covid-19 Bounce Bank loans
- Credit exceeding £25,000 for business purposes
- Interest-free credit, repaid over a maximum of 12 months (see BNPL below)
What about business to business lending?
You don’t need to be authorised if you only offer credit to another business, unless your customer is:
- A sole trader
- A partnership with fewer than 4 partners
- An unincorporated association
If you offer credit to these customers, you probably need to be authorised.
What if I use a third party BNPL provider to provide credit, such as Klarna or Clearpay?
Consumer credit provided by third parties may require that third party to be regulated by the FCA. However, Buy Now Pay Later (BNPL) providers have historically taken advantage of an exemption from the RAO that allows for interest free credit to be provided to consumers without regulation, provided those loans are repaid within 12 months.
In October 2021, the UK government announced a consultation into the proposed regulation of BNPL providers. The consultation acknowledges that the delayed payment of goods and services is exempt from consumer credit regulation provided it is time-limited and does not involve the charging of interest. However, the consultation sets out plans to bring BNPL companies under FCA regulation at some point in the future.
Does this make me a credit broker?
Under the existing regulatory framework, where a business introduces a customer to a lender with a view to the customer entering into a regulated credit agreement, the business will be undertaking the regulated activity of ‘credit broking’. Businesses carrying out credit broking need to be authorised and regulated by the FCA and comply with relevant FCA rules and CCA provisions.
Merchants that offer the use of BNPL and short-term interest-free agreements as a payment option are not currently credit broking because of the current exemption for BNPL loans. However, if the exemption in article 60F(2) of the ROA is amended so that some or all of these agreements become regulated, then merchants’ broking of such credit agreements would constitute the regulated activity of credit broking. Consequently, they would need to apply to the FCA for authorisation and comply with relevant regulation.
The government’s view at this stage is that any regulation of BNPL would be accompanied by an exemption so that the broking of BNPL credit by a merchant would not lead to a requirement that the merchant is subject to regulation as a credit broker
Are there ongoing considerations I should be aware of?
If you intend to provide consumer credit, you will need to apply for FCA authorisation. Authorisation is required for the lender under a credit agreement and the owner for a hire agreement. There are 2 levels of consumer credit authorisation:
- Tier 1 - full credit authorisation for higher-risk consumer credit activities
- Tier 2 - a limited permission regime for lower-risk consumer credit activities
For more information on the FCA’s consumer credit regime please see the FCA’s Understanding Consumer Credit.