It is the week for Financial Conduct Authority [FCA] warnings! Firstly, we saw the FCA issue a “Dear Chief Executive” letter, generally seen as a warning shot across the bow, setting out its position on mortgage lenders requests to change mortgage contracts, including Standard Variable Rates [SVRs] and Tracker Rates [TRs]. Less than a week later, the FCA has been forced to issue another “Dear Chief Executive”; this time it is warning lenders in respect of how they treat small and medium enterprise [SME] customers. The loans in question were commercial loans and although commercial loans are not regulated under the Financial Services and Markets Act 2000 (Regulated Activities) that fact has not stopped the FCA taking action.
Why has the FCA been forced to act now?
The FCA statement on this issue highlights the current situation and states, “The Financial Conduct Authority has now considered the reports published this week by Sir Andrew Large into lending practices at the Royal Bank of Scotland [RBS] and, separately, by Dr Lawrence Tomlinson into banks’ treatment of customers in financial difficulty.” The two reports criticised the bank for its treatment of small firms and it is alleged that the author of the second report said, “The treatment that some of these companies have had is horrendous.”
What will the FCA investigation entail?
In respect of RBS, the FCA will require that an independent skilled person be appointed in accordance with the FCA’s power under section 166 of Financial Services and Markets Act to review the allegations in the reports against RBS practices. The skilled person must have the necessary skills to carry out the review effectively and will report to the FCA within an agreed timescale. If the findings from the review reveal issues which come within the FCA’s remit, the FCA will consider further regulatory measures.
The “Dear Chief Executive” letter
This requires that all other bank chief executive officers must “satisfy yourself that your group does not engage in any of the poor practices alleged in the reports. Clearly it also expects “any poor practices identified to be addressed.” It also states, that the FCA will “will discuss your findings with you, and the basis for them, in one of our regular meetings with you.”
As warning shots go, this is ccertainly a well-aimed shot across the bows – no reader can be in any doubt that the FCA is flexing its regulatory muscles.
How can the FCA regulate ‘non-regulated’ products?
There have been situations in the past where commentators have suggested that the FCA cannot take action against lenders in respect for non-regulated activities. Nothing can be further from the truth – as evidenced today. As the FCA say in their statement, “Commercial lending is not a regulated activity under the Financial Services and Markets Act (FSMA) 2000 (Regulated Activities) Order 2001. Nevertheless, the allegations in these reports gave the FCA concerns as to whether RBS has treated customers appropriately, in particular those in financial difficulties. If substantiated, such allegations may also indicate wider concerns in relation to governance and culture within RBS.” The “Dear Chief Executive” letter reinforced the FCA position “We expect firms to act with integrity across all of their activities.”
Threat to remove Consumer Credit Licences
This is not a new regulatory approach; this stance was set out as long ago as 1997 in respect of the Consumer Credit Act when the then Director General of the Office of Fair Trading indicated that he would indirectly regulate loans which were not technically within his remit by threatening to remove Consumer Credit Licences from lenders who were not undertaking Consumer Credit Act lending utilising the ‘fitness to hold a licence’ rules to regulate the whole lending market. Within the Office of Fair Trading Non-Status Lending Guidelines for Lenders and Brokers dated 18 July 1997 and revised November 1997 the then Director General of the OFT [John Bridgeman] pointed out the fact that all lenders needed a Consumer Credit Licence to provide credit. He stated, “Although mortgage lending is not subject to regulation under the Financial Services Act [as it was not then], a licence is required under the Consumer Credit Act to engage in a credit business or ancillary credit business. The majority of lenders involved in secured lending to non-status borrowers are licensed under the Consumer Credit Act to enable them to enter into regulated consumer credit agreements (where the amount of credit does not exceed the limit prescribed from time to time in regulations). Their fitness to hold a licence may be brought into question by evidence of unfair business practices even where these arise in relation to unregulated credit business or any other business. Most brokers and other intermediaries engaged in the marketing of non-status loans are required to be licensed for the business of credit brokerage, regardless of the amount of credit involved.”
“I have a duty under the Consumer Credit Act to satisfy myself that applicants for licences are fit to engage in the activities for which they wish to be licensed, and to monitor the continuing fitness of those to whom licences have been granted. In considering fitness, I am able to take account of any circumstances which appear to be relevant, and in particular, among other matters, any evidence that an applicant or licensee, or any of its employees, agents or associates, has engaged in business practices appearing to me to be deceitful or oppressive or otherwise unfair or improper (whether unlawful or not). Where my Office has evidence of such practices I can and do take action to refuse or revoke the consumer credit licences of those concerned.
Rules & Regulation for the whole lending market
This can be seen as a statement of intent by the Director General that he would indirectly regulate loans which were not technically within his remit by threatening to remove Consumer Credit Licences from lenders who were not undertaking Consumer Credit Act lending and thereby utilising the ‘fitness to hold a licence’ rules to regulate the whole lending market.
Although 16 years to the month later the FCA approach is no different to that of the OFT and the FCA stance of today reaffirms the fact that regulated firms have to act with integrity across all of their activities. Put simple they have to treat customers fairly whether the customer has a regulated or non- regulated product.