There is a “real risk” that law firms do not understand how tomorrow’s changes to the consumer credit regime could have a serious effect on them – such as needing to be additionally regulated by the Financial Conduct Authority (FCA) – the Legal Services Board (LSB) has warned.
From 1 April the FCA takes over the regulation of consumer credit activity from the Office of Fair Trading (OFT), which is being abolished. The group licence under which law firms firms are currently allowed to carry out certain consumer credit activities will cease from that date.
The FCA is not continuing the group licence regime, so law firms wishing to continue these activities, like debt collecting, may need to be individually licensed by the FCA. As explained by Allison Wooddisse of LexisNexis PSL on this site last week , the definition of consumer credit could extend to law firms’ fee arrangements with clients.
Firms that do not have a licence by tomorrow, or do not have interim permission from the FCA, will have to cease such work. Those that only undertake consumer credit activities that arise out of or are incidental to the provision of their professional service do not need an individual licence, but the meaning of ‘incidental’ is not entirely clear – and even then such firms have to follow the FCA’s consumer credit rules.
In approving changes to the SRA Handbook on 19 March, the LSB said it sought clarification from the Solicitors Regulation Authority (SRA) “on matters to do with the potential impact of the rules change”.
The approval notice continued: “While the SRA explained how it would be communicating these changes to those it regulates, the LSB remains concerned about the extent to which the potential impact has been understood.
“There is a risk that some firms may not be aware of the need to seek FCA authorisation and that others may be confused about whether they need to do so… the LSB considers that the SRA should ensure that it has a robust communication strategy over the coming months to ensure that the transitional period is used to best effect.”
The SRA has to date issued press releases, updates to the profession and social media messages to make solicitors aware of the changes, as well as frequently asked questions which form part of the resources section of the Handbook.
A spokesman said: “We are satisfied with the levels of engagement we have had with our stakeholders and continue to liaise with the FCA.”
Alec Pillmoor, a restructuring and recovery partner at accountants Baker Tilly, said firms that have to abruptly stop work in progress and turn new work away could face financial distress.
He added: “This transfer in administration from the OFT to the FCA, whilst being discussed within the professional circles for some time, may have resulted in many solicitors being caught off-guard, especially as that they cannot rely upon the Law Society block licence any longer.
“Any firm applying this late in the day is not likely to receive interim licences from the FCA, even if they previously held their own OFT-issued consumer credit licence. Any firms intending to apply for full authorisation after 1 April 2014 will face a significant lead-in time to enable scrutiny by the FCA.”