Ask the Expert - Giving Credit and Regulation by the Financial Conduct Authority

    December 2014

    Question:

    Is it true that providing credit terms to customers, or even giving them time to pay invoices, requires authorisation from the Financial Conduct Authority?

    Answer:

    Consumer credit has been subject to significant change over the last few years.  On 1 April 2014 the Office of Fair Trading (OFT), which issued a consumer credit licences to businesses, was replaced with the Financial Conduct Authority (FCA), who now authorises and regulates consumer credit activities.  However, while the rules haven’t changed for a number of years, they’ve been under the radar for many retailers.  The FCA is more likely to discover such arrangements.

    So when do you need to worry?  It’s often when you enter into a “regulated credit agreement” (or have rights under such an agreement).  If you do, you’ll need authorisation from the FCA and have to comply with the FCA’s regulatory framework.  But doesn’t that just apply to banks and building societies?  Unfortunately not: it’s surprisingly easy to enter into a regulated credit agreement.   All you need to do is provide “credit” of any amount to an individual, sole trader or partnership of two or three partners.  And the problem is that “credit” isn’t even defined; it just includes a cash loan or “any other form of financial accommodation”.

    So, simply allowing one of your customers, who’s an individual, sole trader or partnership, further time to pay an overdue invoice could involving providing “credit.” This means you need authorisation from the FCA and must comply with the framework; which includes having a contract sending notices and statements (all in a prescribed form).  If you don’t comply, your agreement is likely to be unenforceable and you’ll be committing a criminal offence if you don’t have authorisation.  There are some exemptions, but they’re prescriptive.  These principles even apply to employee benefits schemes, like season ticket loans and staff loans.  The exemptions are vital to avoid regulation by the FCA.

    Good and early advice can save a lot of headaches.

    Previously appeared in Yorkshire Business Insider on 1 December and is reproduced with the publisher's kind permission