On Friday 27 June 2014, only a few weeks after the Financial Conduct Authority ("FCA") took over the regulation of the Consumer Credit regime, an Order ("Amendment Order") came into force which amends the recently constituted Consumer Credit provisions contained within the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("RAO").
The Amendment Order makes it clear that introducing consumers to a scheme in which a registered social landlord ("RSL") or the Scottish Government agree to provide the consumer with a secured loan or some other secured form of financial accommodation over property is not credit broking for the purposes of the RAO and so the organisation effecting the introduction no longer requires authorisation from the FCA.
This is a fairly unassuming but significant change to the legislation, which will be good news for RSLs and participating builders promoting Scottish Government shared equity schemes.
Credit Broking under the Consumer Credit legislation
Our RSL clients frequently say to us that they did not expect the Consumer Credit provisions to apply to them and are surprised to learn that they may need to apply for authorisation from the FCA. But RSLs, and indeed small developers, are caught by the legislation, notwithstanding that it is geared more towards protecting consumers from payday lenders, credit card companies and the like, rather than organisations who are administering a Government low-cost home ownership scheme.
This is because the definition of consumer credit is so widely drafted that it extends to any organisation which, in the course of its business, agrees to provide a loan or make some form of financial accommodation to individuals (subject to a range of complex exemptions).
The Consumer Credit legislation applies to organisations which carry out 'Regulated Activities' in terms of the RAO, which includes debt counselling (giving debt advice to an individual), debt collection (collecting debt for a lender), debt administration (exercising the rights and duties of a lender), and credit broking (introducing individuals to a lender or to a person who effects such introductions, or assisting an individual with preparatory work in connection with a credit agreement).
Credit broking is a Regulated Activity if it relates to either a regulated credit agreement under the RAO or an agreement which would be a regulated credit agreement but for certain "relevant provisions" which are listed in the RAO.
Impact on RSLs and the Scottish Government Shared Equity Schemes
The arrangement between the Scottish Ministers and shared equity owners under the Low Cost Initiative for First Time Buyers (LIFT) shared equity schemes and the Help to Buy (Scotland) Scheme is treated as a credit agreement for the purposes of the Consumer Credit legislation, since the provision of the interest-free 'equity loan' is characterised as the provision of credit.
Whilst a credit agreement entered into between a shared equity owner and the Scottish Ministers is itself exempt from regulation under the Consumer Credit regime by virtue of Article 60E(5) of the RAO, the activity of credit broking in relation to these schemes was, prior to 27 June 2014, a Regulated Activity, for which FCA authorisation was required. Article 60E(5) of the RAO exempts a credit agreement where (a) it is secured by a legal or equitable mortgage (in Scotland, a heritable security) on land, (b) that land is used or is intended to be used as or in connection with a dwelling, and (c) the lender is a housing authority – which includes RSLs or the Scottish Ministers.
As a result of the Amendment Order, the broking of a credit agreement which is an exempt agreement by virtue of Article 60E(5) of the RAO is not itself a regulated activity. Accordingly, RSLs and developers participating in the Scottish Government's shared equity schemes will no longer require FCA authorisation for credit broking in relation to those schemes. This will apply equally to New Supply Shared Equity ("NSSE"), Open Market Shared Equity ("OMSE") and Help to Buy (Scotland) schemes.
The Amendment Order will undoubtedly be welcomed, particularly perhaps by smaller housebuilders who wish to participate in the Help to Buy (Scotland) scheme and who faced the prospect of having to apply for FCA authorisation. However, the change does not necessarily mean that RSLs are no longer affected by the Consumer Credit regime, since they may still need FCA authorisation for debt collection and debt administration activities undertaken on behalf of the Scottish Government in relation to the shared equity credit agreements.
That being said, RSLs who build and sell new build homes under NSSE might be able to benefit from the 'supplier exemption' contained within Article 39H of the RAO which might exempt them from requiring FCA authorisation for debt collection and debt administration activities in relation to the NSSE scheme.
Organisations, including RSLs, will, of course, also need to consider whether they need to be authorised to undertake any other credit-related activities, such as recovery of the costs of common repairs from owners, employee incentive schemes or a debt advice service.
As is always the case, there is no substitute for reading the legislation - although, this is perhaps not the easiest piece of legislation to get your head around. If you do decide to tackle it then the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2014 should be read in conjunction with Articles 36A and 60E of the RAO.
If you would like legal advice on whether your organisation requires authorisation from the FCA, please contact Collette Miller on [email protected] or 0141 227 9342.