In brief
Traditionally the majority of law firms have relied on a Law Society 'Group Licence' in respect of consumer credit activities, which gave firms an exemption (FSMA 2000, Pt 20)from the requirement to be authorised and regulated by the FCA. The Law Society's Group Licence has been removed. In consequence the SRA has proposed the removal of the exemption from FCA regulation.
The SRA and the FCA have come to an agreement that transitional arrangements for firms wanting to carry out consumer credit activities will be extended until at least October 2015. In the meantime, analysis of responses to the SRA consultation is still in progress.
The impact of this is wider than many may realise. The Legal Services Board warned of a 'real risk' that law firms do not understand the potential impact of the change: “There is a risk that some firms may not be aware of the need to seek FCA authorisation and that others may be confused about whether they need to do so.”
If your firm provides insurance mediation activities, arrange third-party funding, negotiate arrangements with creditors/lenders under consumer credit agreements; and other business transactions such as allowing clients to pay fees by instalments, you may require authorisation by the FCA to continue to undertake such work, from October, or require to cease the provision of such services.
What is the SRA proposing – and why?
If the SRA were to continue to regulate non-mainstream consumer credit activities undertaken by law firms, it would have to incorporate the FCA requirements within the existing SRA regulatory regime. However, the highly detailed and prescriptive nature of the FCA Rules make them difficult to incorporate within Outcomes Focussed Regulations. The SRA believes that it would in fact be incompatible with their outcomes focused approach.
In addition, the SRA has expressed concern in relation both to the FCA guidance and the exemptions:
FSMA regulated activities may be carried on by a member of a [professional body] who is not authorised by the FCA where the regulated activity "...arises out of, or is complementary to, the provision of a particular professional service to a particular client..." (s332(4) of FSMA). The regulated activity "..must be incidental to the provision by him of professional services..." (s327(4) of FSMA).
...the requirement in s332(4) necessitates an assessment of the services provided on a case by case basis rather than by the firm overall. In the SRA's view this is a problem.
The Law Society and the SRA are also seeking counsel's advice on exactly what falls within the scope of consumer credit work.
Implications for law firms: Cost and Complexity
Should this dual regulation become a reality, it will be far more likely that law firms will need to be authorised by the FCA to conduct a wide array of activities.
Ian Cockerill, Compliance Director of SIFA, says: "It is clear that more firms will need to at least consider the issue of whether authorisation will be required to carry out consumer credit activities. There has been considerable doubt as to whether a number of such activities benefit from the Part 20 exemption, the decision to opt out by the SRA would remove all such doubt, although the result may not be popular with firms seeking to benefit from the exemption!"
Obtaining FCA authorisation is an onerous process and the associated costs implications are clear. Furthermore, FCA rules can be notoriously difficult to comply with.
Alongside FCA regulation, firms will continue to be regulated by the SRA for their legal work – with the potential for two separate retainers (according to the Legal Ombudsman consultation response). A distinct possibility is that some firms will chose to stop carrying out consumer credit work for fear of breaching FCA rules.
The impact will reach beyond consumer credit to other currently exempt financial services activities, because firms authorised by the FCA to carry on consumer credit activities will no longer be able to benefit from the Part 20 regime in relation to any other FSMA regulated activities - including incidental financial services.
It could also potentially impact on a wider area including private client work, divorce and financial remedies, and company and commercial work.
The FCA has recently clarified that debt collection and pre-proceedings work will be exempt (where undertaken in the course of providing advocacy services or litigation services); and the actual credit exemption for number of payments increased from four to twelve.
Be aware of your regulatory requirements
Cockerill comments: “Either firms will need to consider ceasing to conduct consumer credit activities (difficult in respect of such client focused activities like debt counselling, debt adjusting, credit brokerage or debt collection) or may need to work out how to comply with the onerous FCA Rules on investment business in relation to previously exempt activities. At first sight it is difficult to see how this is possible without forming some type of alliance with an independent financial adviser.”
Affected firms should ensure that they are aware of the outcome of the SRA consultation. You can subscribe for a consultation update alert via the SRA website.