Posted by Allison Wooddisse, head of practice compliance at Legal Futures Associate LexisNexis
Welcome to the baffling world of consumer credit regulation, where the law of unintended consequences reigns supreme.
Sweeping changes to the consumer credit regime come into force on April Fool’s Day. By all accounts, they aren’t aimed at law firms but only a fool would ignore them.
Why is this suddenly on the agenda?
Consumer credit activities have always been regulated by the Office of Fair Trading (OFT). Although you might not have known it, any consumer credit activities your firm engaged in were covered by a group licence issued by the OFT to the Solicitors Regulation Authority (SRA).
On 1 April, the OFT goes on the government’s bonfire of quangos and the Financial Conduct Authority (FCA) becomes the new regulator for consumer credit.
The FCA is abandoning the group licence regime, meaning that if you engage consumer credit activities after 1 April, you might need an individual consumer credit licence from the FCA.
So, do law firms engage in consumer credit activities?
You might be caught in the consumer credit net by your fee arrangements and/or the type of work you do.
You’ll be caught by the consumer credit regime if your client is an individual or small partnership and you’re extending credit by contractually deferring your fees.
The first point is generally straightforward; it’s the second issue that causes problems.
Over the past few years, firms have become more creative with their fee arrangements, eg reducing fees for early payment or agreeing fixed fees for payment up-front. We’ve analysed 12 examples of the sorts of fee arrangements that exist within the legal market. Some of these could feasibly involve consumer credit but most don’t satisfy the definition of ‘credit’ in the Consumer Credit Act (CCA) 1974, case law and commentary. Remember, if there’s no credit, there can’t be a consumer credit agreement.
Here’s my tip: avoid consumer credit fee arrangements altogether, not for licencing reasons but because:
- Requirements regarding form, content and execution of consumer credit agreements are extremely onerous;
- The consequences of getting it wrong are potentially disastrous (unenforceable agreement); and
- The minefield of potential exemptions should only be navigated by an experienced consumer credit expert.
The type of work you do
Your work type (rather than your fee arrangements) is much more likely to stray into the territory of regulated consumer credit activities.
Most firms dabble in some sort of work that falls within the CCA 1974 definition of ancillary consumer credit business. You could be caught by the definition because you do debt recovery work or simply because you negotiate with a matrimonial client’s creditor to defer payment of a debt pending the outcome of their divorce.
Just because you do some ancillary consumer credit work, it doesn’t mean you need a licence. There are two ways you might be able to continue this work without a licence:
- By relying on the litigation exception—this isn’t massively helpful as you can only rely on the litigation exception if proceedings are issued, which you can’t know at the outset of a matter; or
- By working under exempt professional firms (EPF) regime – this allows you to conduct ancillary consumer credit work (debt collection/negotiation etc) under the regulatory control of the SRA so long as:
- the SRA has relevant rules in place (the SRA will be amending the Financial Services Rules to incorporate consumer credit);
- Your firm is registered on the FCA’s EPF register;
- you account to the client for any commission or other advantage you receive as a result of the ancillary consumer credit activity; and
- the ancillary consumer credit activities are incidental to your professional services
This last requirement is a potential sticking point. HM Treasury and the FCA interpret ‘incidental’ by reference to the firm’s overall services. The SRA seems to think that any ancillary consumer credit activities must be incidental to the work you do for a particular client.
By way of example, if your firm offers a range of services, including debt recovery:
- Following the FCA’s interpretation: debt recovery is incidental to the firm’s services overall and can be conducted under the EPF regime, meaning no need for a licence.
- Following the SRA’s interpretation: debt recovery work is core, not incidental, to the work being done for the particular client, hence a licence is needed
The Act and associated guidance could support either position, which isn’t very helpful.
Isn’t it simpler to just get a licence?
Obtaining an individual consumer credit licence has two main disadvantages: cost and increased regulatory burden.
It’s probably too late now to apply to the OFT for an individual licence and you’ll have to wait for the FCA to unveil its full licencing process. Expect to pay about £1,500 for a licence plus an annual fee to maintain your licence.
Increased regulatory burden
Law firms are already heavily regulated by the SRA. Getting an individual consumer credit licence means subjecting your firm to the oversight of a second regulator, the FCA.
Plus you might get more than you bargained for: you may well find you’re regulated by the FCA for all incidental financial services, including those you currently conduct under the EPF regime. This is because you cannot be simultaneously authorised by the FCA for consumer credit and exempt for other incidental finance services.
Apparently, you’ll still have to comply with SRA rules on the day-to-day conduct of incidental financial services and consumer credit activities, rather than with FCA rules. Try explaining that in your Terms of Business.
The last word
I’m not going to sugarcoat this: it’s a criminal offence to engage in consumer credit activities without a licence, if you need one.
The question is whether you need one or can you:
- Avoid consumer credit fee arrangements; and
- Operate under the EPF regime for ancillary consumer credit activities?
I’m told the consumer credit shake-up is aimed at unscrupulous elements of the pay-day loan industry, not law firms. I’m also told that 8,000 law firms conduct debt work among other services. It’s hard to imagine the FCA wants to become the mainstream consumer credit regulator for these 8,000 firms, which are already heavily regulated by the SRA.
It looks like the FCA is doing its best to interpret CCA 1974 in a broad way, to push the majority of solicitor activities into the EPF regime. Good for them and let’s face it, the FCA is a bigger fish in this pool than the SRA.
So what would I do?
Well, I’d be inclined to follow the FCA’s approach. If my firm:
- doesn’t specialise in debt work (that is, any debt work is incidental to what the firm does overall), I’d be waiting for further guidance from the FCA/SRA before I contemplated applying for a licence.
- specialises in debt work, I’d be applying for an individual consumer credit now.
I’d also be reviewing my fee arrangements to be sure we’re not stepping over the consumer credit agreement line and I’d be looking at the case of Dimond v Lovell to help me understand what credit really is. Plus, I’d be keeping a record of my decision-making process in case I have to justify myself later.
I’d then allow myself a day’s breather before launching myself at the new Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 which come into force in June.
More on that another time.