Changes to regulation of consumer credit work will affect far more law firms than expected, increase compliance costs and capture more activities than envisaged by the Solicitors Regulation Authority.
These are among the alarming conclusions of advisers engaged by the Law Society to provide clarity about the impact on solicitors if the SRA withdraws from regulating firms under the new regime. President Andrew Caplen has written to local law societies updating them on Chancery Lane’s concerns about the shakeup.
Until this year, consumer credit work was regulated by the Office of Fair Trading. The Society held a group licence from the SRA which covered all firms (there remains an exemption for firms pursuing debts in the context of contentious business).
On 1 April, responsibility transferred to the FCA and from next April, firms carrying out activities which are not covered by an exemption will have to be regulated by the FCA. Firms that do such work may be guilty of a criminal offence if they are not.
The SRA recently launched a consultation signalling its preference to withdraw from regulating firms under the new regime, leaving the task to the FCA. The solicitors regulator claims it lacks the resources to implement the changes needed to be compliant with FCA standards.
In the update, Chancery Lane outlines the types of work which would require authorisation by the FCA. These could even include allowing clients to pay by instalments, which could encompass a majority of all firms. These activities are: debt counselling; debt collecting; debt adjusting; credit provision; and credit brokering.
Firms will have to pay hundreds or even thousands of pounds in application fees to be regulated by the FCA, and such applications could take up to a year to approve, Chancery Lane warns. And where a firm is caught in relation to more than one activity (for example insurance mediation and consumer credit), the FCA has made it clear that a firm would pay the higher of the two authorisation fees. It is ‘unlikely’ any activities qualifying for limited permission will be carried on by solicitors, the Society adds.
Other areas of work that could be captured by the FCA include disbursement funding, which could be construed as ‘credit brokering’. This includes cases funded by a conditional fee agreement or damages-based agreement. If a firm arranges either a loan or an after the event insurance policy to cover the disbursements and the other side’s costs in the event of failure, this is likely to be defined as an FCA-regulated activity.
Also potentially caught are: staged fee payments; pre-issue work; and conveyancing firms, where they undertake both insurance mediation work and activities which might be deemed consumer credit-related.
The Society warns that the number of firms likely to be affected by the regulatory transfer, initially estimated at about 1,100, is ‘significantly greater’ than envisaged by the SRA. The change will create ‘additional costs and burdens’ for the profession, it adds.
In calling for a ‘full impact assessment’, the Society says talks with the FCA have suggested there may be greater flexibility for the SRA to continue regulating consumer credit work than previously thought. The costs to the profession of that responsibility remaining with the solicitors regulator would be less than dealing with the FCA, it stresses.
Consultation on the SRA proposal closes next Monday.