“We only accept cash” – the regulation of consumer credit activities
Posted by Trevor Hellawell of Legal Futures Associate MBL Seminars
Hellawell: clarity required as a matter of the utmost urgency
The Solicitors Regulation Authority (SRA) has recently published a consultation paper on the regulation of consumer credit activities.
There are three principal areas of concern:
- Law firms undertaking debt collection and other work on behalf of clients under part 20 – the successor to the OFT block licence (client work);
- Law firms giving clients time to pay their legal fees (own fees); and
- The SRA’s rationale for its proposal and what it perceives to be good for the consumer (consumer perspective).
Debt collection work
According to the SRA, debt collection work will need authorisation by the Financial Conduct Authority (FCA) as from April 2015.
This will entail firms becoming dual-regulated and having to incur the cost of FCA authorisation. The only other option would be to cease undertaking this kind of work.
A more desirable solution would be to make this kind of work excluded or exempt for most law firms but this would require statutory change.
Other debt-related work
In relation to other types of consumer debt and credit related work – debt counselling, debt adjusting, providing credit information services and credit-broking – the SRA suggests that it is not appropriate for them to regulate this kind of work to the standards expected by the FCA, and thus they should relinquish their role of regulator in these areas.
However, there may be other solutions that are less extreme.
To adhere to the proposed regime would risk:
- unnecessary and expensive applications for authorisation that may not be justified;
- a reduction in the number of organisations offering such advice and help (to the detriment of the consumer);
- unnecessary and excessive dual regulation of a small part of the legal services sector
- a deluge of applications – and subsequent regulatory burdens – thrust onto the FCA with which it may not be able to cope.
Knock-on implications of FCA authorisation
The SRA also states that firms applying for FCA authorisation for consumer-credit debt collection work will also need to be regulated by the FCA in relation to ALL regulated activity (including that currently carried on under part 20).
This would render the part 20 exemption almost meaningless for the majority of the profession.
For example, most firms undertake some form of insurance mediation activity under part 20, including arranging title insurance, chancel repair and restrictive covenant insurance for transactional matters and legal expenses insurance for litigation matters.
Bringing all of this within the FCA regime will be a huge regulatory shift for the profession and the FCA and it is submitted that this cannot be in clients’ best interests, nor can it be a desirable development.
This is a matter where clarity is required as a matter of the utmost urgency as there are huge implications for the profession and its clients.
The SRA says that “any form of financial accommodation (including time to pay) will amount to ‘credit’ but the arrangement will be exempt if the number of repayments does not exceed four, the payment term does not exceed 12 months and it is without interest or other charges”.
This ignores the doctrine of debt forbearance and fails to consider the possibility that a law firm may give its client time to pay under its current retainer, which allows for interest under the same contract, without entering into any new contractual arrangement.
This distinction needs to be addressed and firms need to be advised how best to adjust their credit control activities in order to avoid unnecessary regulatory interference in their arrangements with their clients.
The SRA says it does not have the resources or expertise to regulate consumer-credit related regulated activity as part of the part 20 exempt regime and this driver appears to be taking precedence over more important considerations as to what is best for consumers. A lack of resources or knowledge on the part of a regulator should not be deciding factors in what the profession or consumers should expect from a front-line regulator.
Finally, the SRA has suggested that it favours an approach whereby firms, if concerned about whether or not they are undertaking consumer credit activities, should apply to the FCA for authorisation now rather than await the outcome of the consultation process.
This recommendation would appear to prejudge the outcome of the consultation and may influence firms in going to considerable expense to become FCA authorised, when it may not be necessary.
Hopefully, some guidance will be issued soon as the consultation closes on 15 December, with the new regime coming into force in April 2015.
The author gratefully acknowledges the contribution of Philip Ryley of Michelmores, Exeter to this piece.
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Tags: consumer credit, Solicitors Regulation Authority
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