Consumer credit: extending the exemption for instalment credit

• the credit is repayable by no more than 12 instalments and within no more than 12 months;
• it is a borrow-lender supplier agreements (i.e. it finances the acquisition of specific goods or services) (as defined by section 12 Consumer Credit Act 1974);
• it is for a fixed amount (i.e. not a running-account credit agreement);
• it is secured on land or involves no charges or interest (e.g. there can be no admin fees); and
• it is not: <br/>financing the purchase of land; <br/>a conditional sale agreement or hire-purchase agreement; or <br/>secured by a pledge.

This means that any credit agreement made on or after the 18th March 2015 that meets the above criteria will no longer be deemed to be a ‘regulated credit agreement’ therefore exempting it from the provisions of the Consumer Credit Act 1974 and the FCA’s Consumer Credit Sourcebook. Furthermore, firms only entering into, or brokering, credit agreements on or after the 18th March 2015 that meet the above criteria will not require any form of authorisation from the FCA provided they do not carry on any other regulated activities (credit related or otherwise).

It should however be emphasised that the revised exemption is not retrospective. The revised scope of the exemption only applies to agreements made on or after the 18th March 2015, meaning that credit agreements which were entered into prior to the 18th March 2015 and did not meet the previous exemption criteria (e.g. they were repayable via five or more instalments) will remain regulated credit agreements even if they meet the new exemption criteria. This also means that exercising the rights of a lender under such agreements will remain a regulated activity and firms will need to be authorised by the FCA for as long as they have rights under such agreements (unless another exemption can be applied to such activities/agreements).

The changes will have a significant impact, particularly in the insurance market where insurers typically allow policy holders to pay annual premiums in monthly instalments. Extending the exemption brings the UK in line with the Consumer Credit Directive (Directive 2008/48/EC), which specifically excludes insurance contracts where the premium is paid in monthly instalments from the definition of credit agreement. This will be welcomed by the Association of British Insurers who considered the previous position to be placing a disproportionate burden on UK insurance firms and putting them at a competitive disadvantage to their European neighbours.

The FCA has provided guidance for firms affected by this change:

• Interim permission holders that believe the revised exemption applies to all of their activities must inform the FCA by completing the Consumer Credit Notification survey or by cancelling their interim permission.
• If an interim permission holder does currently have active credit agreements within its portfolio which were entered into prior to the 18th March 2015 and did not meet the previous scope of the exemption (and therefore remain regulated), but going forward will only be entering into credit agreements which do meet the new scope of the exemption, the FCA recommends firms consider applying to defer their application window so as to allow those active agreements to complete. The firm’s current interim permissions should cover its activities in respect of the regulated agreements, and provided all regulated agreements have been completed prior to the end of the window no further regulated activities will be taking place meaning the firm would not need to submit an application for authorisation.
• Authorised firms that believe the extended exemption applies to all of their regulated activities must apply to cancel their permission. If firms are engaged in other regulated activities requiring authorisation by the FCA, they will need to apply to vary their permission to remove consumer credit. Authorised firms must complete either of the above by 30 April 2015 to ensure their annual fee (or ‘periodic fee’) for 2015/16 reflects their revised permissions.

If you have any queries about how the changes of the exemption apply to your activities, we would be happy to assist. We have advised many firms on the impact of the FCA regulatory regime on their particular businesses and activities, including the application of exemptions to credit agreements. Our contact details can be found below.

Legislative Order: http://www.legislation.gov.uk/uksi/2015/352/pdfs/uksi_20150352_en.pdf

FCA guidance: https://www.fca.org.uk/firms/firm-types/consumer-credit/instalment-exemption