The regulation of consumer credit is due to transfer from the Office of Fair Trading (OFT) to the new Financial Conduct Authority (FCA) in April 2014. With the new regime in the pipeline and secondary legislation being developed, consumer credit firms should be considering the impact of the forthcoming changes now. In particular, there will be implications for firms who outsource aspects of their operations either to group companies or to independent third parties. Among the requirements, it is notable that:
Firms will need to need to incorporate appropriate obligations on the part of suppliers into any new outsourcing contracts and may need to amend existing contracts to comply with the new regime.
The government's consultation response
On 27 June 2013 the government published a summary of responses to high level proposals for the new regulatory framework for consumer credit under the FCA. A tiered framework of high level standards and more detailed conduct standards is proposed. This will include the FCA’s Principles for Businesses, which establish behaviour required from firms, which will be applicable to all their consumer credit activities. Other high level standards which will apply include the FCA’s senior management arrangements and systems and controls (known as SYSC). Conduct standards setting detailed standards for firms’ conduct will be based on current conduct standards set out in the CCA and OFT guidance.
We set out below some of the implications for consumer credit firms who outsource aspects of their operations.
Compliance with Principles for Business
Under Principle 3 of the FCA Handbook a firm must take reasonable care to organise and control its affairs responsibly and effectively, which includes having adequate systems and controls. Firms’ outsourcing arrangements must meet these requirements.
The FCA considers that the firm’s management is accountable for failings and this applies equally to any arrangement outsourced to a third party. A firm cannot outsource its regulatory obligations and must take reasonable care to supervise the discharge of outsourced functions by its contractor, including obtaining information from its contractor to enable it to assess the impact of outsourcing on its systems and controls. In practice this means carrying out due diligence in relation to suppliers, ensuring that suppliers are contractually obliged to meet appropriate performance standards and monitoring performance in practice.
Under Principle 11 a firm must deal with its regulators in an open and cooperative way and disclose anything relating to the firm of which that regulator would reasonably expect notice. This includes giving prior notice of a proposal to enter into or significantly change a material outsourcing arrangement.
In addition firms must ensure their suppliers permit representatives of their regulator to have access to their business premises, including to records and computer systems. A firm must also take reasonable steps to ensure that any such supplier gives the firm’s auditors the same rights of access to books and accounts of the firm held by the supplier.
In practice firms need to incorporate appropriate obligations on the part of suppliers in their outsourcing contracts. Where outsourcing contracts are already in place the FCA will expect appropriate amendments to be made on their next renewal.
Provisions relating to outsourcing in SYSC8
In addition to the above SYSC8 sets out additional rules governing outsourcing, which only apply to certain authorised firms. However all authorised firms including consumer credit firms are required to take account of these rules as if they were guidance. Firms cannot ignore guidance if they are to demonstrate compliance with the FCA’s Principles for Business.
The rules in SYSC8 include the following:
In addition the firm must ensure there is a written agreement with the service provider recording rights and obligations of both parties. This agreement will need to reflect most of the above conditions.
Where important functions are outsourced to a member of the same group, the extent to which the firm controls the service provider can be taken into account in determining whether the firm has complied with its obligations under SYSC8.
The proposed timetable is such that a final draft of the proposals to be introduced into the FCA Handbook is unlikely to be available until early 2014, that is, not long before firms become subject to the new regime.
What you need to do nowFirms would be sensible to review all current outsourcing and new outsourcing arrangements at an early stage, bearing in mind the above rules and guidance. Firms should seek to insert appropriate obligations into their arrangements with service providers to ensure that they will be able to demonstrate compliance in readiness for next April.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2013. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
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