Regulatory Outlook: Consumer Finance
Current issues: February 2019
Changes to customer-facing documentation in the event of a no deal Brexit
In the event that the UK leaves the EU without a deal on 29 March 2019, lenders will need to ensure that certain amendments are made to the documentation provided to customers both pre-contract and at point of sale, to omit specific EU references. The changes are set out in the Consumer Credit (Amendment) (EU Exit) Regulations 2018.
Whilst the changes are relatively minor in form and do not have any substantive impact on the documentation itself, failing to make the required changes to the Standard European Consumer Credit Information sheet (SECCI) or European Consumer Credit Information sheet (ECCI) could lead to the pre-contract information not being drafted in strict compliance with the Consumer Credit (Disclosure of Information) Regulations 2010 and therefore lead to the credit agreement being enforceable against the customer on an order of the court only.
When do the changes need to be made?
The proposed changes will come into effect on 29 March 2019 in the event of a no deal Brexit. However, in light of the current political uncertainty, HM Treasury has proposed a transitional period to take effect from exit day until 1 September 2019 to provide firms with more time to make the required changes to the pre-contract information.
If a deal is reached prior to 29 March 2019, these changes will not take effect until after the end of any agreed transitional period, currently expected to be from 1 January 2021. For more detail, see here.
FCA publishes Dear CEO letter on financial promotions
On 9 January 2019, the Financial Conduct Authority (FCA) published a letter addressed to CEOs of all regulated firms, reminding them of their responsibility to ensure that all financial promotions are clear, fair and not misleading.
This obligation extends to ensuring that those who view the financial promotion understand whether or not the products or services being advertised are regulated by the FCA and/or the Prudential Regulation Authority (PRA).
Firms should be mindful of their obligations under the FCA Handbook and ensure that where a financial promotion names the FCA, PRA or both as its regulator and refers to products or services which are not regulated, it also makes it clear in the financial promotion which products and services are unregulated.
FCA letter: mortgage prisoners
On 9 January 2019, the FCA published a letter sent to HM Treasury outlining its plan to address regulatory barriers to mortgage switching. The letter, by Andrew Bailey, FCA Chief Executive, defines “mortgage prisoners” as customers on a so-called reversion interest rate who would benefit from switching but are unable to do so, despite being up-to-date with payments on their existing mortgage. The letter considers the approach to customers with active lenders, as well as customers of inactive lenders and unregulated firms.
The FCA plans to work with firms and trade bodies on the practicalities of re-mortgage options and how these should be communicated to affected customers. The next step is for the FCA to publish a consultation paper setting out proposals to remove regulatory barriers to switching for these customers. This is expected to occur alongside the Final Report of the Mortgage Market Study this spring.
Fairness of variation terms
On 19 December 2019, the FCA published its final guidance (FG18/7) on the fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015.
This sets out a list of twelve non-exhaustive factors which the FCA considers to be relevant in determining whether or not a variation term is fair.
Whilst the FCA acknowledges that only a court can determine the fairness of a term, it expects firms to consider the factors set out in the guidance when reviewing existing contracts and drafting new ones. Firms are also reminded of the standalone requirements that terms should be transparent and not unfair.
The FCA has also indicated that it expects overall responsibility for the fairness of a firm’s consumer terms to be set out in the relevant senior manager’s Statements of Responsibilities under the Senior Managers Regime. Firms will need to identify the individual who is best-placed internally to be responsible for this.
In Focus: No deal Brexit
What would be the impact of a no deal Brexit for UK businesses trading with the EU?
In the event that the UK leaves the EU without a deal on 29 March 2019, the UK will become a “third country” for the purposes of EU law. This means that any UK financial services firms that currently rely on passporting rights to offer their services to customers based in a EU Member State will no longer be able to do so in the absence of any equivalence regimes being agreed between the UK and the Member State(s).
There is no passporting regime for consumer credit except for mortgage lenders and for authorised deposit takers (who can offer credit in other EU countries under their banking passport). As now, therefore, UK consumer finance firms that wish to offer credit in the EU post-Brexit will need to establish a branch or subsidiary in the relevant Member State and obtain the necessary authorisation or licences required for carrying on those regulated activities in that country. Firms currently carrying on payments or other regulated activity under a passport will also need to do the same.
Firms should be mindful of the fact that they may be breaching laws and regulations in the relevant Member State if they continue to operate in the jurisdiction following a no-deal Brexit, in the absence of obtaining any permissions required to provide those services.
What would be the impact of a no deal Brexit for non-UK businesses trading with the UK?
The current passporting regime, which enables EEA firms to provide some financial services into the UK on a cross-border services basis based on the permissions they hold in their home state, will fall away on 29 March 2019 in the event of a no deal Brexit.
This means that firms that currently rely on passporting rights under the Banking Consolidation Directive or the Mortgage Credit Directive to offer consumer finance from another Member State into the UK, or vice versa, will need to ensure that they have either:
- set up a branch or a subsidiary in the UK and have obtained the relevant regulatory permissions required to continue to offer their services post-Brexit; or
- registered with the FCA under the temporary permissions regime to enable them to continue to provide regulated business in the UK for a limited period post-Brexit, which is within the scope of their existing permissions.
If an EEA firm wishes to rely on the temporary permissions regime to continue to provide services in the UK in the event of a no-deal Brexit, it will need to ensure that it has notified the FCA using the relevant form available in the FCA’s Connect system by 28 March 2019. There is no fee applicable for notifying the FCA for the regime. Once firms are registered, they will be able to continue to provide their services for a specified period from 29 March 2019 whilst they seek full authorisation from the FCA.
EEA firms that are registered with the FCA under the temporary permissions regime will be required to comply with certain FCA rules and guidance. The FCA is in the process of finalising what rules will apply; however, its proposals are set out in CP18/29: Temporary permissions regime for inbound firms and funds and CP 18/36: Brexit: Proposed changes to the Handbook and Binding Technical Standards – second consultation.
The FCA is proposing to allocate firms that will be solo-regulated by the FCA (for example, just providing consumer credit lending or credit broking) a landing slot in which they will be required to submit their application to the FCA for authorisation in the UK. The FCA will be confirming firms’ landing slots after exit day.
What should businesses be doing now to prepare for a no deal Brexit?
Changes to documentation
In the event of a no deal Brexit, consumer credit firms will be required to make changes to their pre-contract and contractual documentation to remove any references to EU law. This would include the Standard European Consumer Credit Information sheet (SECCI) and the European Consumer Credit Information sheet (ECCI).
These changes (which we discuss in more detail here) are due to come into effect on exit day. HM Treasury has recently proposed a transitional period to enable firms to make these changes, which would run from 29 March 2019 until 1 September 2019.
Consumer credit firms should familiarise themselves with the changes that are required to be made to the customer-facing documentation and should ensure that the relevant systems updates can be made to implement the changes by 1 September 2019 if required.
Providing cross-border services
Firms who are providing credit-related regulated activities cross-border should ensure that they have taken appropriate action to ensure that they are able to continue to provide these services and minimise any impact for customers in the event of a no-deal Brexit.
Dates for the diary
|By 28 March 2019||EEA firms who currently rely on passporting rights to provide services in the UK must notify the FCA that they wish to operate under the temporary permissions regime.|
|By 1 September 2019||Date consumer credit firms are required to make proposed changes to the SECCI and ECCI in the event of a no-deal Brexit.|
|1 January 2021||Date consumer credit firms are required to make changes to the SECCI and ECCI in the event that the UK leaves the EU with a deal on 29 March 2019.|