The OFT gets tough on consumer credit licensing
On 6 April 2008, significant changes to the consumer credit licensing regime were introduced by the Consumer Credit Act 2006. This give greater powers to the OFT in determining who is fit to hold a consumer credit licence, to monitor licencees and to take enforcement action.
The wider range of enforcement powers and sanctions enable to OFT to impose requirements on licensees where the OFT is dissatisfied with any aspect of their business and fine licensees up to £50,000 where a requirement has not been complied with.
The OFT has been quick to flex its new regulatory muscles, by introducing a new application/renewal procedure for consumer credit licences. In particular, applicants are required to demonstrate their ‘credit competence’ with certain ‘high risk’ applicants being asked to provide a Credit Competence Plan on form CCP1 or complete a Credit Risk Profile on form CRP 1.
Broadly, if you are a lender, broker or debt administrator and you operate in the secured or sub-prime sectors, you must complete CRP 1 to obtain/renew your licence. If you want to apply/renew a licence to undertake third party debt collection or fee charging debt management services, you must complete CCP 1. These application forms are very much more detailed than previously; they require information about a wider range of activities and have a strong focus on demonstrating regulatory compliance.
For example, CRP 1, which will apply to all secured lenders and brokers, includes the following:
•Competence questions, including requests for evidence that the applicant and its management have relevant experience in the industry, that training is provided, and where the responsibility for compliance will lie.
•Regulatory history queries, for example whether the applicant has had contact with its local Trading Standards Service. In the event that this is answered in the affirmative, the OFT request details of that contact and the nature of the relationship between the applicant and the local Trading Standards.
•Specific sections request information on the applicant’s advertising policy. This includes details of the media which will be used and whether direct marketing will be generated.
•Details of the applicant’s procedures and strategy for ensuring compliance with the consumer credit regime, from the form and content of agreements to the content of adverts, including how this will be monitored and staff disciplinary procedures in the event of non-compliance.
•Information relating to how the applicant will comply with the Financial Ombudsman Service’s requirements for an appropriate complaints handling procedure.
•There is a further section in the revised forms asking applicants to detail how they will ensure compliance with relevant consumer protection legislation.
•With regard to anti-money laundering procedures, the forms request the details of the applicant’s Money Laundering Reporting Officer (MLRO) and details of the applicant’s anti-money laundering compliance strategy.
There are separate questions asking whether the applicant;
➢Proposes to offer payment protection insurance
➢Will promote/offer debt consolidation
➢Will take fees from its customers, and if so the level of such fees.
➢Receives or makes any referrals to or from lending firms, debt administration firms, credit brokers or others and if so in each case the % of incoming or outgoing referrals attributable to each category.
In addition to all of the above, the new forms ask for a raft of supporting documentation. This will include any compliance strategy, policies (for example in relation to anti-money laundering), a copy of the applicant’s complaints handling and debt collection procedures and any training documentation.
A more rigorous approach to assessing fitness and propriety
The broad range of queries on the revised application forms evidence a new approach by the OFT to focus its resources on business which are engaged in credit activities which, by their nature, pose a higher risk to consumers.
This enables them to adopt a more flexible approach to regulation than the previous one size fits all system. The OFT is likely to use the application forms as an information gathering tool to determine what areas require further scrutiny.
The information collected on the application forms will be used by the OFT under its wider powers to assess the fitness and propriety of an applicant to hold a licence and to provide consumer credit products and services.
Existing licence holders may be asking: “why is this relevant to me?”
There are three main reasons fro this;
1.You will have to complete the forms when next making a licence renewal application;
2.The OFT has the power to send out the application forms to any licensed business at any time and ask it to provide the relevant information;
3.The new regime evinces a very much more rigorous approach to credit licensing than we have ever seen before; this will filter through to all licence holders who will discern a raising of the compliance bar by the OFT.
Of course, the majority of consumer credit licence holders are already compliant with their legislative obligations in respect of consumer credit, data protection, money laundering, consumer protection and Financial Ombudsman Service. Many will welcome a system which distinguishes them for the minority of rogue lenders, broker and debt collectors.
Nevertheless, greater scrutiny means all licence holders would be well advised to ensure that their compliance systems and procedures are up to date across the board, perhaps undertaking their own internal audits to identify any gaps rather than leave it to the OFT to do so.
This is a prerequisite to being judged sufficiently fit and proper to hold a licence, as spelt out in its guidance for licensees and applicants;
Lending irresponsibly will call into question your fitness to be licensed. When considering your fitness, we may ask you to explain the policies and practice that you intend to follow, for example, in assessing ability to repay a loan’.
Whether you are applying for or renewing a licence, you can expect to be required to satisfy the OFT that you;
•Take care when offering/broking credit
•Take full account of the customer’s interests
•Udertake suitable and proportionate checks on the borrower’s creditworthiness and ability to repay.
Why the stakes have just got higher
As well as being more proactive in the assessment of fitness and propriety to hold a consumer credit licence, as of April 2008, the OFT has a new range of tools to identify and tackle non-compliance.
These include the power to obtain a warrant to raid a licensee’s or applicant’s premises, to obtain entry under notice at any reasonable time to observe the manner in which the business is carried on, and to require licence holders to provide information and documents reasonably required for the exercise of the OFT’s functions under the Consumer Credit Act.
Historically, the regulator of consumer credit has been viewed as a fairly tame beast. This is no longer the case. The extensive powers recently acquired by the OFT in this context have elevated it alongside regulators like HM Revenue and Customs and the Health and Safety Executive.
We can expect to see a much tougher approach designed to separate the wheat from the chaff, and existing licence holders who don’t meet the standard will inevitably be amongst the casualties.