- The National Pawnbrokers Association

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Understanding FCA Requirements
March 2014
Nathan Finch,
Deputy President of NPA
National Pawnbrokers Association
Understanding FCA Requirements
March 2014
• 10.30am
Welcome- Nathan Finch, Deputy President of NPA
Introduction- Ray Perry, Chief Executive NPA
• 10.40am
‘Introducing The New Regime’
Nausicaa Delfas, FCA Head of Consumer Credit.
• 11.10am
‘What lies ahead? Key Changes for pawnbrokers’
Ray Watson, Walker Morris
• 11.40am
‘How to Comply- Policies and Procedures’
Stephen Atkins
• 12.30pm
Buffet Lunch
National Pawnbrokers Association
Fairness and
and Excellence
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Introducing the new FCA regime
NPA Conference
Kensington, London
11 March 2014
Nausicaa Delfas
Head of Consumer Credit Supervision, FCA
How regulation is changing
1 April 2014
The Financial Conduct Authority takes over consumer credit regulation from the Office
of Fair Trading
This creates a single regulator for conduct in financial services
The Financial Conduct Authority
Strategic objective:
• ensuring the
Operational objectives:
• promoting effective competition in the interests of
• securing an appropriate degree of protection for
• protecting and enhancing the integrity of the UK
financial system
Our remit:
• Conduct of c25,000 firms
• Prudential soundness of c23,000 firms (those not
regulated by the PRA)
• Responsible for c50,000 consumer credit firms from 1
New regulatory system
Your firm’s FCA authorisation – a two stage
Interim permission registration
Deadline is 31 March
Takes 10 minutes to register online: www.fca.org.uk/clicked
If you don't register by 31 March 2014, you won’t be able to legally continue lending money
Full permission application
A more detailed application than the OFT equivalent:
• Threshold conditions
• Approved persons
Application periods start in October for firms with Interim Permission
Pawnbrokers’ application period to be confirmed at the end of March
FCA fees
Application fees when you apply for full permission
Credit income
Proposed fee
Up to £50,000
£250,000-£1 million
over £1 million
Periodic fees every year once you have full permission
Fees based on your business type and your income
Proposed period fees published 31 March
How the rules change for your firm
Final FCA rules published on 28 February in Policy Statement 14/3
From 1 April:
– OFT requirements move to FCA Handbook
– FCA Rules and Principles will apply – such as ‘treating customers fairly’, systems
and controls
Once you are authorised:
– Approved persons
– Reporting
The FCA’s approach to regulation
The FCA’s approach will emphasise 5 elements:
being more forward-looking
intervening earlier
tackling underlying causes
securing redress
taking meaningful action
More powers and resources than the OFT – for example:
temporarily ban products or restrict sales for up to 12 months
ban firms or individuals
stop misleading financial advertising
impose requirements on firms
require skilled person reports
What we will focus on
Our aim is for a credit market that works for the benefit of consumers
Proactive supervision of firms will aim to deal with issues and address root causes
of problems
Your approach needs to put the interest of your customers at the heart of how
your business is run
This is about:
– culture
– leadership
– clear business practices
How we will regulate you during ‘interim
Responding to issues in individual firms
Visits to larger pawnbrokers
Proactive monitoring of financial promotions and contract terms
Thematic work
How we will regulate you once you have
‘full permission’
Our regulation is risk-based and proportionate
The intensity of our approach will depend on your FCA category: C1, C2, C3 or C4
Majority of pawnbrokers will be in category C4
Three “pillars” of Supervision:
Individual firm assessments
Reactive work with individual firms
Thematic work across groups of firms
Pillar 1: Individual firm assessments
We will regularly assess your firm through reviews/visits
Consider this fundamental question:
Do you have the interests of consumers and
heart of how you run your business?
the integrity of the market at the
Intensity depends on your FCA category
Examples of likely areas of focus
Areas of Focus for Pawnbrokers
Appropriate controls to mitigate against the risk of fraud/crime?
e.g. ensuring it does not handle stolen items
Robust controls in place to ensure accurate valuation of items?
How does the firm mitigate against the risk of inappropriate lending, including how it deals with
‘vulnerable’ customers? e.g. those on very low income/benefits or those with mental capacity
Firm’s redemption policies, how it calculates interest, additional fees/charges
Pillar 2: Reactive work with individual firms
To deal quickly and decisively with problems
Risks identified through variety of sources
You will have to tell us about issues you find
Use a range of tools to put things right
We prefer to work with you voluntarily, but enforce our decisions if necessary
Pillar 3: Thematic work across groups of
Examines emerging risks across firms
First thematic project to be announced soon
Any firm can be included in thematic work outside of its regular assessment
We engage with the industry to set the tone and publicise the outcomes of this work
Action points for you
Register at www.fca.org.uk/clicked by 31 March for interim permission
Visit www.fca.org.uk/consumer-credit to find out more about how we will regulate you
Familiarise yourself with our final rules (Policy Statement 14/3)
Prepare for what’s new:
– High-level principles – such as treating customers fairly
– Complaints rules
– Reporting
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What lies ahead?
The key changes under the new FCA
regime for pawnbrokers
Presentation to NPA members by Ray Watson
11 March 2014
‒ Impact of transfer of Consumer Credit
regulation to the FCA
– Legal framework
– Timescales
‒ Key changes for pawnbrokers
Threshold conditions
Approved persons
CONC sourcebook
Supervision and reporting
Appointed Representatives
‒ What you need to do to prepare
‒ 2014
– February 28th - final rules published
– By 30 March – apply for interim permission
– 1 April transfer to FCA
– 1 July – bespoke HCSTC rules apply
– 1 October- end of transitional compliance period
‒ 2016
– By April – all firms to have applied for full
OFT and FCA regimes - Compared (1)
‒ Detailed law (CCA 1974 and
‒ Supplemented by guidance
‒ Light touch
‒ All entities must be licensed
‒ No UK presence required
‒ Framework law (FSMA)
‒ Detailed COB rules and
guidance in handbook
‒ Rigorous authorisation and
‒ Authorisation or Appointed
‒ All entities must have a UK
OFT and FCA regimes - Compared (2)
‒ Fitness and propriety
‒ Personal liability
‒ Licensing fees relatively
‒ Higher scaled fees based
on turnover
‒ No reporting requirements ‒ Regular reporting and
disclosure obligations
‒ Wide ranging powers
‒ Limited powers
‒ Unlimited fines and
‒ Enforcement - £50,000
consumer restitution
maximum regulator fine
‒ Price cap for high cost
‒ No price controls
short term loans
Threshold Conditions
‒ From authorisation onwards
‒ Pawnbroking is ‘high risk’
‒ Minimum standards required
Legal status
Location of offices
Effective supervision
Appropriate resources
Business model
‒ ‘Fit and proper’ test for management
‒ Failure may = variation/cancellation of permissions
‒ Pawnbrokers must advise how value items and
charges on redemption
Approved Persons
‒ Individuals or entities
‒ Approved to perform controlled functions
‒ Significant influence functions
‒ Have considerable sway over how the
business is run
‒ Subject to significant personal
Becoming an Approved Person
‒ Must be ‘fit and proper’
‒ On an ongoing basis
‒ Detailed application process
‒ Possible interviews by FCA
‒ Personal accountability
‒ Subject to disciplinary action/fines
The Consumer Credit Sourcebook (CONC)
‒ What is familiar?
– Agreements and SECCI largely as before
– Advertising /financial promotion too for pawn –
(although speed is an incentive)
– Adequate explanations (limited for pawn) (4.2.5 (6))
– Post contractual processes/Debt Collection (CONC 6
and 7)
– Mental capacity/vulnerable consumers (CONC 2.10)
– FOS complaints process (DISP)
– Financial crime/AML (EG, DEPP MLRs)
CONC 6.6 Pawnbroking
‒ Pawn receipts unchanged (s 114(1) CCA)
‒ Redemption and sale processes too
(section 121 CCA)
‒ Record requirements in CONC 6.6.3 –
‒ Replicate existing rules under 1983 Pawn
Records Regulations
CONC – what’s new?
‒ Definition of High Cost Short Term Credit
– Borrower/lender or P2P agreement (not DCS)
– APR of 100% or more
– ‘Substantially’ repayable within 12 months
– Unsecured
– NOT home credit, a bill of sale, or an overdraft
‒ Much wider than ‘Payday’ loans
‒ But exempts pawn agreements
Bespoke rules for HCSTC
Risk warning on adverts (now simplified)
Maximum of two rollovers
No refinancing unless in consumer’s interest
Limits on use of Continuous Payment
– No more than two attempts without contact
– No part payments
‒ BUT FCA have made it clear being outside
definition will not avoid scrutiny for other short
term lenders.....
CONC - Supervision
‒ Classification C1-C4
‒ Dedicated supervisor or team
‒ Prioritisation by risk/consumer harm
‒ All firms will be visited by the FCA at
least once every 2 years
‒ Supervision will be based on level of risk
with bigger firms more closely supervised
‒ Thematic reviews
You can expect a visit...
“We will initially be delivering a hybrid supervisory
approach to consumer credit firms during the
interim permission period. We will focus on the
way that firms treat their customers by: conducting
firm-specific visits to the largest firms within certain
sub-sectors, including debt management, debt
pawnbrokers and credit card issuers. we assess
whether a firm is being run in a way that results in
the fair treatment of customers, minimises risks to
market integrity and does not impede effective
CONC – reporting requirements
‒ Every 6 or 12 months, depending on
turnover (6 months if turnover £5m+)
‒ Regulatory reporting
‒ Product sales data
‒ Wide scope of information
‒ To enhance market understanding
‒ And shape future FCA approach
Pawnbrokers need to report
Total customers
Total number of loans
Total number of transactions (each item counts
Total value of loans (outstanding and in a given period)
Number and value of loans in arrears
Average APR
Highest APR
Complaints (received, outstanding, closed, upheld)
Redress paid in response to complaints
For reporting purposes
“In the case of pawnbroking, each item
that is used as security should be counted
as a separate loan”
 Creditworthiness assessment is more limited for
 Security is enough provided liability no more
than value of article plus interest with no
additional charges
 But for unsecured loans:
 Rigorous affordability checks
 Guidance has become rules
 Must be able to evidence such tests
 Positive obligations to check income/expenditure
 Link with reporting requirements?
Appointed Representatives
An appointed representative (AR) is a person or
firm who conducts regulated activities and acts as
an agent for a firm directly authorised by the FCA.
The directly authorised firm is known as the AR's
N.B. lenders who charge for credit provision cannot
be ARs, they must be directly authorised
AR requirements
‒ A written contract
‒ In prescribed terms
‒ Principal takes FULL written responsibility for
AR’s compliance
‒ AR must meet Threshold Conditions
‒ AR must accede to Principal’s supervision
– Access to staff, premises, records
– Ongoing monitoring
‒ Appointment via online application
‒ Stronger, earlier regulatory
‒ Preventative, proactive
‒ Focus on minimising consumer
‒ A sea-change compared to the OFT
Powers of the FCA
Refuse and revoke authorisation
Take civil action
Take disciplinary action against individuals
Impose fines
Product intervention powers
– Imposed without consultation for up to 12 months
– Prohibit product sale
– Render existing agreements unenforceable
‒ Impose a price cap from January 2015
‒ Prosecute
But probably even more important...
‒ A change in regulatory attitude
“Our message to any company that harms their
customers – the clock is ticking.”
“Our enforcement teams are already working with
the OFT so that we can take action where existing
rules aren’t being followed and where we believe
that firms are continuing to harm consumers.”
Obvious implications for credit firms
‒ Costs will rise significantly
‒ Record keeping will have to be good
‒ Arrangements with agents and third
parties will need to be considered carefully
to limit risk
‒ Senior management will have to be
focused on compliance and consumers
Wider consequences
‒ Market exit
‒ Reduction in competition
‒ Barriers to entry
‒ Higher charges for borrowers
‒ Overall decline in consumer detriment
‒ Express warning against ‘gaming’
Preparation, preparation, preparation
• Review of policies and procedures
• Role of key individuals to be Approved
• Product/process changes
• Cost/resource
• Training
• Monitoring and supervision
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Understanding FCA
Stephen Atkins
SA Compliance Management Ltd
Skilled Persons Panel
• SACM is appointed for Governance, Systems &
Controls and Risk to the Panels of the Bank of
England, the Prudential Regulatory Authority
and the Financial Conduct Authority.
PS 14/3 applies the FCA Handbooks
From 1 APRIL 2014 all consumer credit firms
must comply with the FCA’s high level standards:
• The Principles - PRIN
• The Systems & Controls Rules - SYSC
• Status Disclosure - GEN
• Financial Promotions – COBS/CONC
The Usual Path to FCA Authorisation
1. Application and preparation of supporting fit
& proper documents.
2. Compliance Plans preparation.
3. Authorisation.
4. Regulated business starts, subject to FCA High
Level Standards Handbooks.
FCA renumbers the steps to
0. Interim Permission
4. Application of FCA Handbooks to firms on 1
April 2014
2. Compliance plan transition options,
April – October 2014
1. Preparation for Authorisation
3. Authorisation – H2 2015?
What does the FCA mean by
The FCA will adopt a higher starting point for
conduct standards than many firms may realise.
• “There is a view that people are not frightened
of the FSA. I can assure you that this is a view I
am determined to correct. People should be
very frightened of the FSA.”
• Hector Sants. FSA CEO. March 2009.
What does the FCA mean by
Pawnbroking is regulated as Higher Risk
Many customers are seen as “vulnerable”
But many firms are “small”
The FCA Handbook(s)
Prudential Standards
Business Standards
Regulatory Process
Specialist Sourcebooks
• Rules
• Guidance
• guidance
• Speeches
• Reviews
Understanding Your Next Steps
1. Understanding and applying the FCA
Handbooks, GEN, PRIN & SYSC wef 01/04/14
2. Preparing and applying a compliance plan for
CONC wef 01/04/14 – 01/10/14
3. Review record keeping, financial promotions,
complaint handling, financial reporting etc
Action: GEN
• All customer communications must state that
you are regulated by the FCA wef 01/04/14
• You do not have to say you only have interim
or limited permission
• The standard rule in GEN 4.3 will apply from 1 April 2014.
Action: SYSC
• Principle 3 states that
• ‘a firm must take reasonable care to organise
and control its affairs responsibly and
effectively, with adequate risk-management
Action: SYSC
Prepare and maintain written processes for
• Organogram
• Controlled Functions & Job Descriptions
• Senior Management arrangements
• Regulatory Business Plan
• Compliance Plan
• System and Controls
• Internal Audit
• Financial Crime
Action SYSC
Money Laundering
Record Keeping
Conflicts of Interest
Action: PRIN
You will need to evidence how you apply these Principles to
your business 1 A firm must conduct its business with integrity
2 A firm must conduct its business with due skill, care and
3 A firm must take reasonable care to organise and control its
affairs responsibly and effectively, with adequate riskmanagement systems
4 A firm must maintain adequate financial resources
5 A firm must observe proper standards of market conduct
6 A firm must pay due regard to the interests of its customers
and treat them fairly
Action: PRIN
7 A firm must pay due regard to the information needs of its
clients, and communicate information to them in a way which is
clear, fair and not misleading
8 A firm must manage its conflicts of interest fairly, both
between itself and its customers and between a customer and
another client
9 A firm must take reasonable care to ensure the suitability of its
advice and discretionary decisions for any customer who is
entitled to rely on its judgement
10 A firm must arrange adequate protection for clients’ assets
when it is responsible for them
11 A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately
anything relating to the firm of which the FCA would reasonably
expect notice
Action TCF & Conduct Risk
Prepare and apply a written policy that evidences –
• Customers are central to your business
• Customers achieve their expected outcome and
understand what is involved
• How the firm knows what customers are thinking
• The firm’s conduct risk appetite
• The firm use of internal audit and MI
• How this information is used to control conduct risk
and what does the firm do when things go wrong
Action: AUTH
• Approved Persons
• Controlled Functions
• Compliance Arrangements
• Regulatory Business Plan
Working with the NPA
• Telos Solutions Ltd –Richard Farr
• Regulatory Finance Solutions/Consumer
Credit Advisory Services Ltd – Alison Scott
Thank You
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