This article provides an introductory overview of consumer credit regulation in the UK.
If your business is looking to provide consumer credit in the UK, it’s important to understand which consumer credit products and services are subject to regulation and what that means for your business. We cover the process For further advice or support in understanding how regulation may affect your business, our experienced consumer credit lawyers can provide practical and tailored legal advice to help you navigate the UK’s regulatory landscape.
- Why is UK consumer credit regulated?
- What is the UK regulatory landscape for consumer credit?
- Which types of UK consumer credit activities are regulated by the FCA?
- What about Buy-now-pay-later (BNPL) agreements?
- What type of FCA authorisation do I need?
- Are there exemptions from authorisation available?
- What are the key FCA rules for conducting consumer credit activities?
- What are the consequences of consumer credit firms breaching regulatory requirements?
Why is UK consumer credit regulated?
Consumer credit plays a key role in supporting the UK economy. When people can borrow money safely, economic transactions can take place efficiently and the economy can grow. Yet credit and debt can also affect the daily lives of tens of millions of consumers, for better or worse. Many of these people may be vulnerable because of their financial situation or personal circumstances.
The UK government aims to deliver a consumer credit market which not only provides economic benefits and fosters technological innovation but also delivers strong and clear consumer protections, allows consumers to make informed choices and allocates responsibility fairly between consumers and businesses. UK regulation of consumer credit is one of the tools used to advance these objectives.
What is the UK regulatory landscape for consumer credit?
Back in 1974, the Consumer Credit Act (CCA) consolidated a fragmented range of consumer credit protections into a single piece of legislation. The CCA has since been regularly updated and supplemented by other UK consumer credit regulations.
In 2014, responsibility for the licensing and oversight of consumer credit moved from the Office of Fair Trading to the Financial Conduct Authority (FCA), bringing the regulation of consumer credit under the same umbrella as other key financial services. At the time, large parts of the CCA were withdrawn. The UK Government has recently consulted on a further major overhaul of the CCA which would involve repealing many of its remaining provisions and replacing these over several years with regulatory rules made by the FCA.
However, for the moment, if your business is offering UK consumer credit and debt services you will need to comply with relevant requirements both in UK consumer credit legislation, including the CCA, and under the FCA’s regulatory regime. This article focuses on FCA regulation.
Which types of UK consumer credit activities are regulated by the FCA?
The scope of UK financial services regulation (sometimes referred to as the ‘regulatory perimeter’) is set by H M Treasury under powers granted by Parliament. In scope activities are known as ‘regulated activities’. HM Treasury has defined these regulated activities in secondary legislation called the Regulated Activities Order (RAO). You can find out more about the regulatory perimeter and regulated activities in our article about the Financial Services and Markets Act.
Regulated activities in the RAO which are relevant to consumer credit activities are referred to as ‘credit-related regulated activities’. If your business is lending to consumers or providing other types of credit-related service to them on a commercial basis, you need to carefully consider whether your business may be undertaking credit-related regulated activities. If you are, you will need to seek authorisation from the FCA.
A ‘consumer’ for these purposes includes both individuals and particular types of small partnership or unincorporated association.
Credit-related regulated activities broadly include:
- Entering a credit agreement as lender (or exercising lender’s rights under this type of agreement)
- Entering a consumer hire agreement as owner (or exercising owner’s rights under this type of agreement)
- Providing debt services (debt adjusting, debt counselling, debt collection or debt administration)
- Providing credit information or credit referencing services
- Operating an online peer-to-peer lending platform (in relation to borrowers on the platform).
What about Buy-now-pay-later (BNPL) agreements?
Entering a BNPL agreement (or similar agreements for short-term interest free credit) is not currently a regulated activity. However, the UK government has made clear its intention to bring BNPL activities into regulation and has published draft legislation to make this happen. This is expected to come into effect in 2024.
If your business is offering BNPL arrangements, you should still keep abreast of regulatory developments. Even before BNPL comes under its regulation, the FCA has already moved to monitor consumer outcomes in the BNPL market. The FCA has used its powers under general consumer law to challenge BNPL terms and conditions which it sees as unfair. It has also messaged strongly to BNPL firms about the quality of financial promotions and supporting customers under cost-of-living pressures.
What type of FCA authorisation do I need?
If your business is undertaking credit-related regulated activities and you are not otherwise exempt, you will need to obtain authorisation from the FCA. You can read more about the FCA authorisation process in our article: ‘FCA authorisation: Does your firm need it and what’s involved?’.
To ensure that the authorisation process for consumer credit firms is tailored and proportionate, the FCA offers two authorisation tracks: ‘limited’ and ‘full’ permission. If your business is applying for limited permission, you’ll experience a shorter application process and pay a lower application fee.
Limited permission is only available if your firm’s operations are restricted to certain lower-risk activities. These include:
- consumer hire (such as tool and car hire)
- certain types of credit broking where your main business is non-financial (e.g. motor dealerships and high-street retailers that introduce customers to a finance provider)
- credit broking in relation to consumer hire or hire purchase agreements
- certain interest-free deferred payment arrangements (e.g. golf clubs or gyms allowing deferred payment for membership)
- certain consumer credit lending by local authorities
- debt counselling and/or debt adjusting provided by not-for-profit bodies, including those who also provide credit information services.
If your business is doing other credit-related regulated activities, you’ll need to apply for full permission.
Are there exemptions from authorisation available?
Yes. Some firms such as accountants, solicitors, actuaries, licensed conveyancers and chartered surveyors which are regulated by professional bodies can undertake some credit-regulated regulated activities without FCA authorisation if they follow rules set out by their own professional body.
In addition, there are limited exemptions for particular entities when doing specific credit-related activities (see FCA Perimeter Guidance manual 2.11). These include targeted exemptions, for example, for charity go-fund-me sites, cycle to work schemes, official receivers, debt tracing agents and process servers.
What are the key FCA rules for conducting consumer credit activities?
Once authorised, your business will be required to comply with relevant rules and guidance in the FCA’s dedicated Consumer Credit (CONC) sourcebook. These rules cover a range of aspects, including:
- conduct of business and responsible lending standards
- financial promotions for credit-related products
- pricing restrictions for high-cost short-term credit, rent-to-own and overdrafts
- treatment of customers in arrears
- debt advice
- guidance on providing information under the CCA
- customer cancellation rights
- minimum financial resources to be held by consumer credit firms.
In addition, your business needs to operate in accordance with other high-level FCA requirements, including the FCA Principles for Business and the new consumer duty. Your business must also meet management and control standards set out in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) and establish complaints handling processes compliant with the Dispute Resolution: Complaints sourcebook (DISP).
What are the consequences of consumer credit firms breaching regulatory requirements?
Providing credit-related regulatory activities without authorisation is a criminal offence and, in the most serious cases, could lead to prosecution by the FCA. However, of more concern are the civil penalties that attach to breaches of regulatory rules made by the FCA. Civil sanctions can cause very real difficulties for firms which breach their regulatory obligations, even inadvertently.
If the FCA identifies a potential breach of rules in your regulated business, they are most likely to enter dialogue with you to learn more and ask you to put things right. If matters are not quickly resolved, the FCA may then use its powers to require your business to act, or to stop doing something they believe could cause problems.
Where serious breaches are suspected or issues have not been properly resolved, the FCA can launch a formal investigation into potential wrongdoing. If a breach is subsequently proven, this could lead to significant sanctions on a business or the individuals running it, including substantial fines, customer redress or public censure.
For these reasons, understanding and complying with your consumer credit regulatory obligations is vital for your business.
Fair and transparent dealings are key for establishing customer trust and growing the reputation of your consumer credit business.
If your business is providing consumer credit in the UK, you need to consider whether you need to be authorised by the FCA. You should also ensure that you understand all your regulatory and other legal obligations to minimise any compliance risks for your business.
Failure to comply with consumer credit regulation can cause significant issues for your firm, or for any individual designated by your business as responsible for compliance.
Our team of financial services solicitors can provide business-specific advice on the consumer credit regime and related FCA authorisation and compliance requirements. We can also support you on all the latest developments in BNPL regulation and the planned overhaul of the CCA.