Social Housing Speed Read – FCA guidance on high-cost credit
7th January, 2019
The Financial Conduct Authority (FCA) published Guidance on 18 December 2018 for Registered Providers (RPs) that may be involved in helping to provide alternatives to high-cost credit for tenants in the social housing market.
Please click here to view the guidance.
Lower risk, cheaper alternatives to products have been called for in the industry; where misleading pricing and unaffordable loans have pushed already at-risk tenants into further difficulties. This Guidance builds on the Consultation Paper that the FCA launched in November which cited similar problems in the rent-to-own market, where high product prices, high interest charges and add-ons (such as insurance and extended warranties) can have a destabilising financial impact on vulnerable housing tenants.
The Guidance refers to alternatives such as less onerous loans, or even non-credit alternatives that tenants may not be aware of. It aims to alleviate some of the effects of high-cost credit products whilst assisting RPs to avoid conducting activities that would require authorisation by the FCA, such as credit-broking.
Whilst the problems caused by high-cost credit products such as loans for household appliances with high weekly repayments have been well-documented, the report suggests that by its nature the social housing model can exacerbate the issue and push tenants towards high-cost forms of credit. As a result of the need to move quickly into new accommodation tenants can be left with few other options than high-cost credit in order to obtain essential furniture and appliances that they need.
The FCA have also recognised that tenants in vulnerable circumstances are particularly at risk. The result is that RPs may often wish to assist their tenants in procuring goods and appliances such as beds and fridges, however this can leave them open to advising tenants in a way that may be prohibited by the FCA.
It was recognised in the FCA’s [Consultation] that there was uncertainty with RSLs ‘inadvertently crossing the boundary into regulated credit brokerage or debt advice by referring to other organisations/services’. Concerns were also raised regarding the costs and complexity of carrying out regulated lending activities such as credit broking (a broker linking an individual to a supplier of consumer credit, normally for a commission).
From a practical standpoint, the Guidance highlights the value of alternatives such as furniture re-use schemes or community organisations that assist tenants in obtaining appliances. Other possibilities include loans from credit unions which would have more favourable terms than high-cost credit products, and Community Development Finance Institutions (CDFIs). It has been suggested that local authorities will be encouraged to take an interest in fostering CDFIs if they see alternative lending as part of a preventative strategy; complementing advice and support networks and assisting tenants before they reach crisis point and turn to high-cost options.
However, it is likely to be of greater importance to RPs that the types of activity that they undertake are not classified as credit broking.
One benefit is that the Guidance reiterates the exclusion for local authorities, which do not have to comply with the legal requirement to achieve authorisation from the FCA for credit-regulation activities such as credit-broking, debt counselling and debt adjusting. Likewise, the exemption to the rules for appointed representatives of an authorised person will avoid these activities being caught under legislation.
Whilst credit broking is defined in legislation, it is important to stress that whether an activity is considered as such depends on the individual facts and circumstances of the case. The Guidance sets out 3 types of activity that will be considered credit-broking whether or not the broker receives a fee, and 3 where the broker does receive a fee or other financial reward:
Credit broking activities regardless of fee:
- effecting an introduction of an individual who wishes to enter into a credit agreement to another person, with a view to that person entering as lender into a credit agreement by way of business
- effecting an introduction of an individual who wishes to enter into a consumer hire agreement to another person, with a view to that person entering as owner into a consumer hire agreement by way of business
- effecting an introduction of an individual who wishes to enter into a credit agreement or a consumer hire agreement to a person who carries on an activity in (1) or (2) by way of business (in other words, to another credit broker)
Credit broking activities where a fee or other compensation is paid:
- presenting or offering an agreement which would (if entered into) be a credit agreement
- assisting an individual by undertaking preparatory work with a view to that person entering into a credit agreement
- entering into a credit agreement on behalf of a lender
If the test for a regulated activity is met, then the RP will have to obtain authorisation from the FCA. This process will vary based on the ‘size and nature of the regulated activity… and the potential risks to consumers’. Before applying, it is recommended that landlords consult the FCA’s checklist for what is required, here. Some landlords may already be registered for other activities and need only request a variation of permissions, whereas others may need to submit their business plan to the FCA as part of the authorisation process.
In conclusion, the Guidance can be seen as a positive step towards making social landlords both aware of ways in which they can assist their tenants and of a clear process to access support regarding regulated financial activities. Additionally, this Guidance is particularly welcome given the recent report by the NFA and ARCH which cited the roll out of Universal Credit as a driver of increasing rent arrears, which may in turn lead to tenants using high-cost credit products.
The FCA have also set up a specialist team that can provide individual guidance to social landlords. For more information and specific advice, they can be contacted via e-mail at: RSL@fca.org.uk.
If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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