1. The Building Societies Association represents mutual lenders and deposit takers in the UK including all 45 UK building societies. Mutual lenders and deposit takers have total assets of nearly £380 billion and, together with their subsidiaries, hold residential mortgages of over £250 billion, 20% of the total outstanding in the UK. They hold nearly £260 billion of retail deposits, accounting for 21% of all such deposits in the UK. Mutual deposit takers account for 30% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.
2.The BSA welcomes the opportunity to comment on CP 13/10 (the CP).
3. The key points in our response are as follows -
We broadly welcome many of the proposals in the CP such as those relating to the Firm Systematic Framework, status disclosures, and transitional provisions (see paragraphs 17 – 23 below).
However, we believe that there are a number of examples of unintentional ‘gold-plating’ in the draft CONC Sourcebook that, if not excised, could cause practical problems following April next year (see paragraphs 12 – 16 below).
4. During the first decade of the 2000s, the UK Government ‘front-ran’ EU legislation on consumer credit and, once the EU legislation had been enacted, it gold-plated a number of provisions. This led to complications and uncertainties in the legislation that were not beneficial to consumers or businesses.
5. In its response in March 2011 to the HM Treasury and BIS consultation, the BSA welcomed in principle the proposed transfer of regulatory responsibility from the OFT to the new conduct regulator, but (having regard to the complicated nature of the legislation), stated –
“Regarding the options for dealing with the consumer credit legislation under the FCA, the BSA questions how practicable it would be to repeal the legislation, reassemble it, and transfer its provisions to the Regulator’s Handbook of Rules and guidance, at the same time as much wider regulatory regime change. While we understand the arguments favouring the proposal, certain factors militate against it, as follows –
after the upheaval over 5 or 6 years in consumer credit laws, all concerned would benefit from a period of calm and consolidation, rather than further disruption
it would expect a great deal of a new regulator, during its initial period of consolidation, to take on such a major, complicated piece of additional work
the Regulatory Policy Committee has described the analysis of potential costs and benefits of the proposed change as “incomplete”
there appear to be legal obstacles to taking this route in view of the fact that the Directive is one of maximum harmonisation
the approach would seem to be inconsistent with the Government’s recent pledge against ‘gold-plating’ EU law.”
6. Therefore, we had no objection in principle to what was proposed, but had serious concerns about how the migration was planned in practice, particularly the relatively short timetable.
7. Consumer credit is a niche, rather than a core, business area for our membership. A small number of BSA members (primarily those that offer current accounts) engage in new lending regulated under the Consumer Credit Act. Most of our members have no current consumer credit lending, but some have pre-MCOB consumer credit back-books, which are dwindling in number. We understand that these related to secured loans under the relevant limit at the time (most recently £25,000) to existing mortgagors for purposes other than home improvement. Other BSA members have no consumer credit customers at all. All BSA members are currently regulated by the FCA (and previously by the FSA and the FSA as ‘shadow’ FCA), so the wider conduct regime is not new to them.
8. For these reasons, we do not respond in detail to the CP and concentrate mostly on the new draft consumer credit sourcebook (CONC). We particularly focus on areas where the new regime appears to go beyond the existing one or where there are drafting issues. However, we also touch on the relevant statutory instruments, which are outside the CP, but form an integral part of the overall picture, and on some general issues under the CP.
The Statutory Instruments
9. Historically, there were some very unhelpful, unintended overlaps between the consumer credit and mortgage regulation regimes. While these problems appear to have been eradicated over time by legislation and case law, it is important to ensure that no further unintended overlaps arise from the current exercise.
10. Nevertheless, there appear to be potential problems with the new statutory instruments that underpin the migration ie the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013 (SI No 1881) and the Financial Services Act 2012 (Consumer Credit) Order 2013 (SI No 1882) www.legislation.gov.uk/ukdsi/2013/9780111100516/contents. They include -
wording in SI No 1881 that could potentially catch organisations such as comparison websites and aggregators, which could in turn cause problems for consumer credit lenders that are required to identify intermediaries in their prescribed information documents
a provision in the same SI intended to deal with peer-to-peer lending but which might inadvertently capture electronic platforms between lenders and intermediaries.
a risk that, because of a drafting issue in the same SI, certain types of land mortgage might inadvertently fall outside the land mortgage exemption, and
certain other minor inconsistencies and possible errors elsewhere in the SI and in SI No 1882.
11. While we recognise that these are matters for the Government (and the relevant trade bodies are currently liaising with the relevant Departments), and not directly for the FCA, they form an important element underpinning the new regulatory regime for consumer credit.
The New Sourcebook
12. Turning to the CP, and in particular CONC, we have a number of observations. In March, the FSA consulted on the principle of turning OFT guidance into FCA rules and guidance (CP 13/7). The FSA stated –
“We intend to approach replicating the substance of the guidance so that firms that already comply with it are unlikely to need to change their behaviour”.
13. Unfortunately, a key issue is that some OFT guidance has been translated into FCA rules (binding) or guidance (not binding, but indicating a way of complying with a rule and that could be potentially relevant in enforcement). Furthermore, some of the helpful explanatory or clarificatory guidance in ILG has not been carried across to CONC. This approach is against a background whereby –
firms have been led to expect by the regulator that it will be broadly sufficient to continue with current compliance arrangements,
consumer credit breaches may now become ‘reportable’ under the FCA’s Principle 11 (ie dealing with the regulator in an open and cooperative manner) and enforcement may follow in respect of failure to report,
private individuals may have rights of action under section 138D FSMA, and
failing to comply with certain consumer credit requirements can also mean that agreements are unenforceable or that interest cannot be charged.
Specific examples of potential difficulties arising from the chosen approach include the following –
Pre-contractual disclosure (including content of quotations)
14. Certain CONC draft provisions appear - no doubt unintentionally - to gold-plate, or increase the stringency of, existing provisions without an apparent policy basis for doing so; for example -
In a number of provisions the corresponding OFT guidance is converted into a rule. eg 4.3.2R – converts the OFT Irresponsible Lending Guidance ILG 3 guidance to a rule.
4.3.5R, adopting this technique, represents a hardening of the position in ILG 3.4 -
3.1 – “In accordance with the requirements of section 55A(1) of the Act, before a regulated consumer credit agreement, other than an excluded agreement, is made with a borrower, the creditor must …”
But the OFT elaborates its expectations as follows –
“The OFT expects creditors to adopt a proportionate approach to the provision of explanations of credit products to borrowers. Nevertheless, the law requires that the explanation provided should be adequate to place the borrower in a position enabling him to assess whether the agreement is adapted to his needs and his financial situation.”
In our view, in deciding on the level and extent of the explanation to be provided, the creditor, his representatives, agents or 'relevant third parties' should consider, to the extent that it is appropriate to do so and having regard to the relevant legal requirements, a number of factors including…” (3.4)
Adopts similar wording –
“Before making a regulated credit agreement the firm must: …”
But the equivalent provisions are rules, eg -
“In deciding on the level and extent of explanation required by CONC 4.3.5R, the lender or credit broker must consider (and each of them must ensure that anyone acting on their behalf must consider) factors including …” (4.3.7R)
In certain draft CONC provisions there is a formulation that states – ”this section applies as if rules are guidance (and as if ‘should’ appeared in the rules instead of ‘must’)” eg 4.3.2R and 4.4.2R. We are puzzled by this approach and would be grateful for clarification. Possibly this is an attempt to accommodate nuances in the OFT guidance, such as where the OFT expressed a view that lenders should consider principles behind certain statutory provisions (eg section 55A Consumer Credit Act) even where they did not apply to the agreement in question? However, unless we are missing something, we do not believe that the distinction between Rules and Guidance in the Handbook should be blurred in this way.
4.3.3G appears to represent a hardening of the position set out in ILG 3.
Financial promotions and communications with customers
There appear to be some uncertainties about what is meant by certain provisions eg 3.3.5R (2) “average member of the group”; and 3.3.9R “likely cost of premium rate telephone call”. Clearer guidance on such points would be welcome.
There appear to be uncertainties in what is specifically required by certain provisions eg 5.3.2R to 5.3.4R.
Taken as a whole, 5.2.1R appears to go beyond Consumer Credit Act section 55B and ILG 5, and might even exceed the Consumer Credit Directive requirements.
Greater explanatory detail was provided in ILG 4, some of which has not been carried across.
15. We believe that, especially in the light of the intention stated just before legal cutover by the FCA’s predecessor that the new provisions would be unlikely to require firms to change their behaviour (see paragraph 12 above), the FCA should revisit the CONC draft provisions that gold-plate, or widen the scope of, the existing arrangements and rigorously excise the examples of super-equivalence.
16. Apart from the inherent unfairness of gold-plating, it is contrary to the spirit of the Government’s clear pledge, in 2010, that there would be no more gold-plating. It would also be unhelpful if FCA enforcement were inhibited, for example by challenges on the basis that the Rules breached the maximum harmonisation aspects of the Consumer Credit Directive.
The CP Generally
17. We welcome the intention stated in paragraph 4.24 that the Firm Systematic Framework classification (C1 – C4), which firms already regulated by the FCA are gaining a practical understanding of, will be used in relation to consumer credit supervision.
18. The BSA notes the FCA’s stated intention to adopt certain elements of industry codes on a case-by-case basis. There are a number of relevant codes and, as stated in our response to CP 13/7 –
the BSA is a strong supporter of voluntary codes and, over time, has developed several such mechanisms either alone or in conjunction with other parties. Voluntary codes potentially have a place where formal regulation is absent and where business activity is in need of regulation or supervision, but they lose their utility (and, indeed, become counterproductive and risk double jeopardy) where they overlap with, or replicate, formal rules and laws.
Industry guidance, falling short of a code of practice, can also sometimes have a role where a formal regulator decides not to provide such guidance but, again, any overlap or duplication (and potential double jeopardy) needs to be guarded against.”
We therefore await publication of the final Rules, at which time an assessment can be made regarding the future of relevant codes of practice.
19. The BSA also welcomes the transitional provision regarding enforcement set out in paragraph 5.30 of the CP. However, the suggestion that a firm would have to demonstrate compliance with OFT guidance is a non sequitur – this should surely be a requirement that the firm can demonstrate that it “had regard” to such guidance?
20. Regarding the proposals for high-cost, short-term credit, including payday loans, set out in chapter 6 of the CP, we broadly welcome the definition to be included the Handbook Glossary (paragraph 6.13). In particular, we naturally support the sensible exclusions (mortgages, current accounts etc). However, it is important that the FCA is not tempted to reduce the proposed parameter regarding the APR (ie 100% or more). The loans that represent the mischief that the FCA seeks to address are a relatively recent phenomenon and the definition of them should not be such that it inadvertently captures different types of loan that are already regulated under other provisions.
21. While we profess no particular expertise in this area, we understand that some sectors are concerned that the peer-to- peer lending proposals (chapter 8) could unintentionally affect certain electronic platforms. As noted above, there is a similar concern in relation to one of the statutory instruments. The BSA would only make the point that, from time-to-time, inadvertent and unintentional regulatory capture was an unhelpful feature of the old consumer credit regime and strenuous efforts should be made to ensure that the phenomenon does not return – it is unhelpful to consumers and businesses alike.
22. We simply note the proposals relating to second charge loans, which (as chapter 10) states, are likely to change when the EU Mortgage Credit Directive is implemented.
23. The BSA welcomes the concession regarding status disclosures (referred to in paragraph 1.8 and 1.14-1.17 of Part B on page 107 of the CP). This is helpful to firms, because it is consistent with existing arrangements, without causing any practical consumer disadvantage.