If you are a local authority or housing association that is thinking of making a loan to a tenant or local constituent, then you must make sure your loan is compliant with the consumer credit regime. There are changes to the Consumer Credit Act which mean that if you supply credit under your current licence after 1 April 2014, you may be committing a criminal offence.
Following the banking crisis and the onset of the credit crunch, it has become increasingly difficult for small businesses and consumers to obtain loans (at attractive rates) which may have been readily available, prior to 2009, from traditional sources of credit such as the high street banks.
This drying up of credit has led to local authorities and housing associations exploring the possibility of making loans to local constituents or housing tenants, either to boost the local economy or to help pay for some major improvements works to housing stock available and required under a lease.
The difficulty with providing loans to sole traders and to general individual members of the public is that such loan agreements are likely to be considered to be Consumer Credit Agreements for the purposes of consumer credit legislation.
The consumer credit regime
A regulated Consumer Credit Agreement is any agreement in which a creditor supplies credit to an individual borrower. An individual can include a partnership consisting of two or more individuals not all of whom are corporate bodies; it also includes unincorporated associations, such as clubs, where not all of the members are corporate bodies.
If an agreement is deemed to be a regulated Consumer Credit Agreement, then there are a number of requirements as to the form and content which an agreement must take and the information which must be supplied before the consumer signs the agreement. The form and content of the advertisement for such loans is also regulated.
If a loan to an individual is considered to be a regulated Consumer Credit Agreement, then the failure to either obtain a licence or comply with the Consumer Credit Act 1974 could have serious consequences, ranging from criminal prosecution to the agreement itself being deemed to be unenforceable against the individual, i.e. the lender cannot get their money back if the consumer defaults.
There are a number of exemptions that local authorities and housing associations can take advantage of. For example, a local authority is exempt from the need to obtain a consumer credit licence to carry out consumer credit business. However, unless the agreement itself is exempt from the requirements of the Act, i.e. it is secured by land or comes within another exemption, the agreement itself will still need to comply with the requirements of the Act in order to be enforceable.
The current consumer credit regime is regulated by the Office of Fair Trading (OFT), which issues all consumer credit licences. However, following the Government's shake-up of the regulation of the financial services sector, the consumer credit regime is passing from the OFT to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in 2014. This means that all consumer credit licence holders will become subject to the regime under the Financial Service and Markets Act 2000.
The change of regulator also means a change from a rules-based regulation of consumer credit to a principles-based system of regulation which is currently in place for other financial services and products such as investment advice. This will include the introduction of the Principles for Business (integrity, customer interests, care and diligence) for providers of consumer credit. Providers of consumer credit will also be subject to more detailed conduct standards.
There will also be a requirement to obtain authorisation from the FCA to conduct regulated consumer credit activities, and then to make appointed representatives (key individuals) of the authorised entity.
Housing associations or subsidiaries of a local authority that currently hold a consumer credit licence can take advantage of the interim permission regime, which gives them a longer period of time to make sure that their practices comply with the new FCA regime.
From 1 April 2014, current licence holders can apply to the FCA for an interim licence. They then have until April 2016 to apply for a full licence (although each individual licence may vary). However, those that do not obtain interim permission will need to apply for the full consumer credit authorisation from the FCA by April 2014. Otherwise, if they carry on regulated activities under their current OFT licence after April 2014, they will be committing a criminal offence.
Bevan Brittan is a market leader in providing advice to local authorities and registered providers of housing. If you are considering making such loans, and wish to discuss this in any further detail, please contact us.