Everyone knows that most commercial finance business is not regulated by the FSA. But that’s not to say it is totally unregulated. Over the years parts of the regulatory framework designed to protect the consumer have been expanded and the result has been that, however unwittingly, parts of the commercial finance market have been caught in the overlap.
The problem for us as an Association is twofold. Firstly, ‘regulation’ doesn’t simply apply to rules enforced by the FSA – there are other regulators: the OFT, for example. Just because something doesn’t fall under the FSA’s remit doesn’t mean it’s not regulated. The Consumer Credit Act (CCA) is a case in point. The second (and larger) problem is simply the power of the myth stated in the first line of this article. When the subject of regulation is raised, the automatic response from many commercial finance brokers is simply to switch off and say: “It doesn’t apply to me.” Well, I hate to be the bearer of bad tidings but I’m afraid sometimes it does.
Consumer Credit Act
For example, over a year ago, the Association notified all its members with regard to changes in the Consumer Credit Act which meant that some business contracts were caught by this piece of legislation. The £25,000 ceiling was removed, so now the value of the contract is irrelevant when determining whether it will be regulated by the CCA or not. The second major change was the change of the definition for an ‘individual’ to include sole traders or partnerships of three or less people. So, now a partnership of three people looking to borrow £250,000 to purchase a property is a regulated contract under the Consumer Credit Act.
Part of the problem for us is that these changes weren’t hugely publicised at the time they came into effect. Although we notified our members of the changes and we wrote articles for some of the trade media at the time, ironically because FSA regulation supersedes the CCA, and most trade press is aimed very much towards the FSA regulated, residential broker; these changes didn’t affect those who would actually deal with the kind of consumer the CCA was actually designed to help. Not only that but the kind of broker it did impact upon, the commercial broker, was caught accidentally.
The Consumer Credit Act is a complicated piece of legislation and the full implications of being ‘caught’ by it equally complicated. Section 155 of the Consumer Credit Act illustrates the lack of joined up thinking perfectly. Section 155 states that in a CCA regulated agreement where a client engages a credit broker to introduce him or her to a source of credit if, within 6 months of the broker making such an introduction, the client does not enter into an agreement with the introduced funder for whatever reason, the broker has to refund all fees and commissions earned which are over and above £5.
Now, in an FSA contract, this rule has been superseded, allowing an FSA regulated broker to charge a reasonable fee for their time and skills in putting a deal together. No such protection for a non-FSA regulated commercial broker who, by and large, is not dealing with the kind of vulnerable consumer the Act was designed to protect. On this basis, any deal that doesn’t end in completion for any reason (and, you have to admit, there are plenty of good reasons out there at the moment) is in danger of leaving the broker with a negative balance for the work they’ve put in.
In order to protect our members’ income, the Association has been working with the Consumer Credit Trade Association and has also employed the services of a specialist lawyer to check the word of the law and how it applies to brokers who work with businesses. This work has revealed that there are exemptions to the Consumer Credit Act: one of which is loans or leases of £25,000 or more which are “wholly or predominantly for the purposes of a business”. If brokers get their clients to sign a declaration stating that this is the case (and the Association has put together a template to help members) at the same time they would normally get them to sign their standard terms of business then the deal can proceed without referral to the CCA rules.
But it is important to note that this is neither an opt out, nor a ‘Get out of jail free’ card. In the event of a dispute, each case is assessed on its own merits and the presumption can be overruled if the creditor (or, importantly, “any person who has acted on the debtor/hirer’s behalf in connection with the entering into of the agreement”) knew, or had reasonable cause to suspect, that the agreement entered into was not for such a purpose.
The key here is simply awareness. Brokers need to look at deals as they come across them and assess whether they would be caught by the revised CCA and if they are to make sure that all the ‘i’s have been dotted and ‘t’s crossed. If the deal is from a sole trader or small partnership of three or less individuals, then the broker should know to get a disclaimer signed along with his standard terms of business agreement.
Many brokers I have spoken to are unaware that the £25,000 ceiling was removed some twelve months ago and still think that because all the deals they do are larger than this, the CCA rules don’t apply. Similarly, we still get calls to the Exeter office from brokers looking to join the Association who say they don’t need a Consumer Credit Licence because they “only deal with businesses.” Not all the deals a business does are “wholly or predominantly for the purposes of a business”; and those that aren’t – a small company purchasing the director’s spouse’s car, for example – are caught.
As an Association we can help raise awareness among our membership, but only if people are willing to take their blinkers off (or ear plugs out) when the word “regulation” is uttered. Tempting as it might be, unfortunately ignoring the issue doesn’t make it go away. But there is a potential payoff for reputable brokers. Section 155 of the Consumer Credit Act can be used to challenge some of the up-front fee fraudsters who have been operating in the market and damaging the good reputation of legitimate brokerages. Even with a signed disclaimer the practices of these ‘brokerages’ won’t stand up to any kind of scrutiny and the using the CCA rules to challenge them offers a route straight to the OFT.