As an independent lawyer you’re already used to a sometimes, frankly, baffling heap of regulation. And there’s a new complication looming on the horizon in the shape of consumer credit that might just catch you out. Its reach might surprise you.
Sweeping changes to the consumer credit regime come into force on April Fool’s Day. By all accounts, they aren’t aimed at law firms but only a fool would ignore them.
Don’t get caught out. You could be affected by your fee arrangements and / or the type of work you do. Read on to find out who’s impacted by the upheaval and what you can do about it now.
Why is this suddenly on the agenda?
Consumer credit activities have always been regulated by the Office of Fair Trading (OFT). Although you might not have known it, any consumer credit activities your firm engaged in were covered by a group licence issued by the OFT to the SRA.
On 1 April, the OFT goes on the Government’s bonfire of quangos and the FCA becomes the new regulator for consumer credit.
The FCA is abandoning the group licence regime, meaning that if you engage consumer credit activities after 1 April 2014, you might need an individual consumer credit licence from the FCA.
So, do law firms engage in consumer credit activities?
You might be caught in the consumer credit net by:
- your fee arrangements, and/or
- the type of work you do
You’ll be caught by the consumer credit regime if:
- your client is an individual or small partnership and
- you’re extending credit by contractually deferring your fees
The first point is generally straightforward; it’s the second issue that causes problems.
Over the past few years, firms have become more creative with their fee arrangements, for example by reducing fees for early payment or agreeing fixed fees for payment upfront. We’ve analysed 12 examples of the sorts of fee arrangements that exist within the legal market. Some of these could feasibly involve consumer credit but most don’t satisfy the definition of ‘credit’ in CCA 1974, case law and commentary. Remember, if there’s no credit, there can’t be a consumer credit agreement.
Here’s my tip: avoid consumer credit fee arrangements altogether, not for licencing reasons but because:
- requirements regarding form, content and execution of consumer credit agreements are extremely onerous
- the consequences of getting it wrong are potentially disastrous (unenforceable agreement)
- the minefield of potential exemptions should only be navigated by an experienced consumer credit expert
The type of work you do
Your work type (rather than your fee arrangements) is much more likely to stray into the territory of regulated consumer credit activities.
Most firms dabble in some sort of work that falls within the CCA 1974 definition of ancillary consumer credit business. You could be caught by the definition because you do debt recovery work or simply because you negotiate with a matrimonial client’s creditor to defer payment of a debt pending the outcome of their divorce.
Just because you do some ancillary consumer credit work, it doesn’t necessarily mean you need a licence. There are two ways you might be able to continue this work without one:
- by relying on the litigation exception (but this isn’t particularly helpful as you can only rely on the litigation exception if proceedings are issued, which you can’t know at the outset of a matter)
- by working under exempt professional firms (EPF) regime—this allows you to conduct ancillary consumer credit work (debt collection/negotiation etc) under the regulatory control of the SRA so long as:
- the SRA has relevant rules in place (and thankfully the SRA will be amending the Financial Services Rules to incorporate consumer credit)
- your firm is registered on the FCA’s EPF register
- you account to the client for any commission or other advantage you receive as a result of the ancillary consumer credit activity
- the ancillary consumer credit activities are incidental to your professional services
It’s this last requirement that could potentially become a sticking point – there’s a bit of a standoff between the powers that be. HM Treasury and the FCA interpret incidental by reference to the firm’s overall services. But She SRA seems to think that any ancillary consumer credit activities must be incidental to the work you do for a particular client.
For instance, if your firm offers a range of services, which include debt recovery:
- following the FCA’s interpretation: debt recovery is incidental to the firm’s services overall and can be conducted under the EPF regime, meaning no need for a licence
- following the SRA’s interpretation: debt recovery work is core, not incidental, to the work being done for the particular client, hence a licence is needed
This is not particularly helpful. The Act and associated guidance could support either position.
Isn’t it simpler to just get a licence?
Getting an individual consumer credit licence has two primary disadvantages: cost and increased regulatory burden.
It’s probably too late now to apply to the OFT for an individual licence and you’ll have to wait for the FCA to unveil its full licencing process. Expect to pay about £1500 for a licence plus an annual fee to maintain your licence, or around £750 if you’re a sole practitioner.
Increased regulatory burden
Law firms are already heavily regulated by the SRA. Getting an individual consumer credit licence means subjecting your firm to the oversight of a second regulator.
Plus you might get more than you bargained for: you could find you’re regulated by the FCA for all incidental financial services, including those you currently conduct under the EPF regime. This is because you cannot be simultaneously:
- authorised by the FCA for consumer credit and
- exempt for other incidental finance services.
In addition, rather than simply following FCA rules, you’ll still have to comply with the SRA on the day-to-day conduct of incidental financial services and consumer credit activities. Try explaining that in your Terms of Business.
So what now then?
I’m not going to sugarcoat this: it’s a criminal offence to engage in consumer credit activities without a licence, if you need one. The question is whether you need one or can you:
- avoid consumer credit fee arrangements and
- operate under the EPF regime for ancillary consumer credit activities
Received wisdom dictates that the consumer credit shake-up is aimed at unscrupulous elements of the payday loan industry, not law firms. And around 8,000 law firms conduct debt work among other services. It’s hard to imagine the FCA wants to become the mainstream consumer credit regulator for these 8,000 firms, which are already heavily regulated by the SRA. It seems like the FCA is doing its best to interpret CCA 1974 in a broad way, to push the majority of solicitor activities into the EPF regime. Good for them and let’s face it, the FCA is a bigger fish in this pool than the SRA.
Don’t get caught out: take 3 precautionary steps
I’d be inclined to follow the FCA’s approach and if my firm:
- doesn’t specialise in debt work (any debt work is incidental to what the firm does overall), I’d be waiting for further guidance from the FCA/SRA before I contemplated applying for a licence.
- specialises in debt work, I’d be applying for an individual consumer credit now.
It would also be sensible to take the following steps –
- Review your fee arrangements to be sure you’re not stepping over the consumer credit agreement line.
- Look at the case of Dimond v Lovell to refresh your understanding of what credit really is.
- Keep a record of your decision-making process in case you have to justify yourself later.
Then you’re permitted to have a bit of a rest before launching yourself at the new Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 which come into force in June.
But I’ll save that treat for another time – sign up to the Business of Law blog now to make sure you don’t miss a beat.