Article
7 mins read
Updated on 19 October 2023
Our subject expert
John Pauley
Partner - Financial Services
If your business is looking to offer consumer credit in the UK, understanding the regulatory framework set by the Financial Conduct Authority (FCA) is essential.
From licensing and authorisation to ongoing compliance, credit-related regulated activities are tightly governed under UK financial services regulation. Whether you’re lending, brokering credit or providing debt services, getting this wrong can lead to serious penalties or even criminal sanctions.
In this guide, we explain how consumer credit is regulated in the UK, which products and services fall within scope, and what your business needs to do to meet its regulatory obligations. Our experienced financial services solicitors can provide tailored advice to help you navigate FCA authorisation, identify potential exemptions, and ensure your compliance policies and practices are fit for purpose.
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 significantly impact the daily lives of tens of millions of consumers, for better or worse. Many of these individuals may be vulnerable due to 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.
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 At the time, large parts of the CCA were withdrawn.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.
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, known as 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 partnerships or unincorporated associations.
Credit-related regulated activities broadly include:
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 it clear its intention to regulate BNPL activities and has published draft legislation to implement this. This is expected to come into effect in 2025.
If your business offers BNPL arrangements, you should stay informed about 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 utilised its powers under general consumer law to challenge the terms and conditions of BNPL, which it considers unfair. It has also messaged strongly to BNPL firms about the quality of financial promotions and supporting customers under cost-of-living pressures.
If your business is undertaking credit-related regulated activities and you are not otherwise exempt, you will need to obtain authorisation from the FCA.
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:
If your business is doing other credit-related regulated activities, you’ll need to apply for full permission.
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.
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:
Additionally, your business must operate in accordance with other high-level FCA requirements, including the FCA Principles for Business and the FCA's Consumer Duty framework. 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).
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 it believes 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.
Getting authorised by the FCA is just the beginning. Once regulated, your business must meet a wide range of ongoing legal and compliance responsibilities – from responsible lending standards and complaint handling, to the implementation of the FCA’s consumer duty. As the consumer credit regime continues to evolve, especially with the upcoming regulation of BNPL arrangements and the overhaul of the Consumer Credit Act, it’s crucial to stay ahead of regulatory change.
Our financial services solicitors can help you understand whether your firm needs FCA authorisation, guide you through the application process, and advise on the FCA rules that apply to your consumer credit activities. We can also support your firm in responding to regulatory changes and managing compliance risks as your business grows.
About our expert
Partner - Financial Services
John is a specialist financial services regulatory solicitor who advises fintechs, payment service providers, e-money institutions, consumer credit firms, merchants and many more on navigating complex UK financial regulation.
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