Where social housing landlords refer their tenants to low costs credit providers such as credit unions and community development finance institutions (“CDFIs”) or providers on goods on hire, they may find themselves carrying on the regulated activity of credit broking and falling within the scope of financial regulation that may require authorisation by the Financial Conduct Authority (“FCA”).
The FCA has recently updated its December 2018 guidance on this subject, taking into account new relief from financial regulation for registered social landlords introduced by law which came into force in July 2019.
In this article, we will provide the context and an outline of the updated FCA guidance.
Social Housing Model
A social housing tenancy offers the opportunity of a secure tenancy (secure tenancies may be granted for an indefinite period, for example) and unlike private sector tenancies, social housing rents are much cheaper and the tenants are generally not required to pay a deposit to cover damage to furnishings or goods provided to them. Unsurprisingly, therefore, tenants of the social housing sector in the UK are dominated by the low-income households which are unable to afford market rents.
Under the current social housing model, however, low-income tenants often have to wait a long time (it has been known to take more than a decade) for their allocation of a social-housing tenancy due to high demand for it. Moreover, these properties are usually let unfurnished and a lot of the times without floor coverings. Such tenants would feel compelled to accept their allocation offer on the landlord’s terms and whatever conditions there are for fear of losing the tenancy.
One of these conditions is that the tenant is given a very short notice period to move into the property since landlords, such as housing associations, are under pressure to let empty properties quickly to minimise running costs. Notice periods are known to be as short as five days. Having to move into the property in such haste means that the tenants do not have sufficient time to organise their finances to secure the necessary white goods, furniture and floor coverings.
These tenants would often need to turn to high-cost financing options (e.g. high-cost credit providers or rent-to-buy companies) for basic decoration and furnishing, which contribute to their financial hardship despite a tenancy that offers stability and security.
Response of social housing landlords
Recognising this issue, social housing landlords – including local authorities and housing associations – are currently introducing their tenants to alternatives of high-cost financing. These alternatives range from loans from credit unions and CDFIs or furniture package schemes that supply basic furniture packages to tenants with no-up-front costs but are re-charged through service charges, to non-credit alternatives such as an “add-on” schemes offered by landlords to provide second-hand goods, decoration supplies or vouchers.
Social Housing Landlords – A word on terminology
The Housing and Regeneration Act 2008 (“HRA”), Housing Act 1996, Housing (Scotland) Act 2010 and Housing (Northern Ireland) Order 1992 govern the regulation and funding regimes of social housing in England, Wales, Scotland and Northern Ireland respectively.
Each piece of legislation provides for a specific regulator and a registration regime for social landlords but there is no consensus on the terminology.
For example, the registration regime under the HRA provides for two types of social housing landlords: “local authorities” and “private registered providers”. The Regulator of Social Housing is responsible for the registration of social housing providers and for maintaining a “register of the providers of social housing” in England. Each entry in the register that is not a local authority must designate whether the organisation is profit-making or non-profit-making (e.g. charities).
In Wales and Scotland, the Wales Ministers and the Scottish Housing Regulator are responsible, respectively, for registering social housing landlords as “registered social landlords”, which are limited to the categories of non-profit making organisations. In Northern Ireland, the Department of Communities is responsible for the registration of housing associations as social landlords.
However, the FCA uses the term “registered social landlords” in its guidance to refer to all social housing landlords collectively, which are registered with the relevant housing regulator in England, Wales, Scotland and Northern Ireland and is not restricted only to those registered in Wales or Scotland.
Regulated Activity of Credit Broking
In helping tenants to find alternatives to high-cost financing, RSLs may find themselves unwittingly falling afoul of the regulated activity of credit broking under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). This is particularly relevant when RSLs refer tenants to credit providers, credit brokers or providers of goods on hire.
It is important to note that being registered with the relevant social housing regulators does not entitle RSLs to carry on regulated credit broking activities, for which authorisation by the FCA is required.
Article 36A of the RAO specifies six types of activities that would be considered credit broking. These are:
- Effecting an introduction of an individual who wishes to enter into a credit agreement to another person with a view of that person entering into a regulated credit agreement by way of business as lender (e.g. professional lenders such as credit unions or CDFIs);
- Effecting an introduction of an individual who wishes to enter into a consumer hire agreement to another person with a view of that person entering into a regulated consumer hire agreement by way of business as owner (e.g. furniture package rental providers);
- Effecting an introduction of an individual who wishes to enter into a consumer credit agreement or consumer hire agreement to another person who effects introductions of the types in (1) or (2) above (e.g. another credit broker);
In addition, there are another three types of activities which are considered credit broking if the credit broker receives a fee or any other form of financial consideration (e.g. RSLs receiving commissions from credit providers):
- Presenting or offering which would (if entered into) be a regulated credit agreement;
- Assisting an individual by undertaking preparatory work with a view of that person entering into a regulated credit agreement; or
- Entering into a regulated credit agreement on behalf of a lender.
Whether an activity performed by a RSL is considered to be one of the above credit broking activities would depend on the particular set of circumstances and facts (including considerations on the degree of continuity, the existence of a commercial element, the scale of the activity and the proportion which the activity bears to other activities carried on by the same person but which are not regulated) and must be assessed on a case-by-case basis.
The FCA has indicated in the examples set out in its “Finalised guidance FG18/6: Helping tenants find alternatives to high-cost credit and what this means for social housing landlords” (“FG18/6”), first published in December 2018 that, as a general rule of thumb, referrals by RSLs without identifying or recommending a specific provider or giving any contact details of a provider are unlikely to be considered credit broking.
- Providing general information on the RSLs’ websites about services available from credit providers such as credit unions or CDFIs;
- Referring tenants to a local charity or community organisation that gives away free household goods (but does not act also as a credit broker or provider of good on hire); or
- Referring tenants to a seller of goods such as second-hand furniture shop (provided that the seller does not provide credit, goods on hire or act as credit broker).
The FCA also gave examples of the kinds of activities that are likely to be regarded as credit broking:
- Referring tenants to or recommending a specific credit provider (for a fee) or a specific credit broker or a specific provider of goods on hire;
- Providing tenants with details for contacting a specific credit provider or broker; or
- Taking the lead in contacting a credit provider or setting up a meeting on a tenant’s behalf.
Where the RSLs’ activities are considered to be credit broking regulated under Section 36A of the RAO, they will require authorisation by the Financial Conduct Authority (“FCA”) in accordance with Section 22 of the Financial Services and Markets Act 2000 (“FSMA”) unless they are exempt persons or the activity is covered by a relevant exclusion by virtue of a RSL’s status.
For instance, a RSL will be able to carry on credit broking as an exempt person and be exempt from FCA authorisation if it is an appointed representative of a FCA authorised person (such as a credit union or CDFI that the RSL refers tenants to). On the other hand, credit broking activities carried out by RSLs which are local authorities are excluded from being regulated activities and hence no authorisation is required.
New law July 2019
New exclusions of certain credit broking activities from regulation are now available to RSLs under the Financial Services and Markets Act 2000 (Regulated Activities)(Amendment) Order 2019 that came into force on 23 July 2019 (“Amendment Order”).
The Amendment Order adds a new Article 36FA to the RAO, which excludes the following activities from being regulated credit broking activities if the RSL does not receive a fee and the introduction is made to a:
- Credit union;
- Community benefit society;
- Community interest company limited by guarantee;
- Registered charity or its subsidiary; or
- Subsidiary of a RSL.
Other credit broking activities that RSLs carry on which do not fall within any of the above exclusions would either require FCA authorisation or need to carried out as an appointed representative of a FCA authorised person.
Updated FCA Guidance
in October 2019, the FCA updated its guidance under FG18/6 to include the new exclusions under the Amendment Order. The guidance explains when RSLs might be considered carrying on regulated broking activities and provides an overview on the authorisation requirements and application process for RSLs.
The core guidance includes:
- Risk-based approach. The FCA takes a risk-based approach towards authorisations. This means that the amount of information that the FCA requires from an applicant RSL is proportionate to the level of risks associated with the RSL’s particular credit broking activities to the tenants as consumers.
For example, the referral activities carried on by a RSL where the RSL makes no charge or receives no renumeration from the credit providers are perceived to be of little risk of driving tenants to unaffordable or inappropriate sources of finance. This is because in these circumstances, the RSL is unlikely to have any incentive to introduce tenants to high-cost credit providers as it does not receive any renumeration from credit providers for the introduction.
- Specialist Authorisation Team. The FCA has set up a specialist authorisation team dedicated to assessing applications from RSLs as well as providing individual support and guidance to them throughout the authorisation application process. RSLs may make contact with the team at RSL@fca.org.uk.
- Preparing for authorisation application. RSLs may refer to an online checklist that provides a list of information that they would need to provide to the FCA in support of their authorisation applications, which includes, amongst other things, a business plan, a completed IT self-assessment questionnaire and any relevant business documents (e.g. draft agreements, pre-contract information, promotional literature and website screenshots).
The business plan of a RSL must include information on the services that the RSL provides, the types of tenants and the scale of the RSL’s referral services, the legal status and organisational structure of the RSL, its long term strategy and financial plans, as well as its experience of performing any FCA regulated activities (e.g. if the RSL is already authorised and holding permissions for regulated activities other than credit broking).
- Permission required. RSLs may apply for “limited permission” or “full permission” for their credit broking activities in their authorisation application. The FCA will require more details about the RSL’s business and make more checks for a full permission application.
Limited permission is available for certain types of activities only and is not available for RSLs which are already authorised for another regulated activity that requires full permission.
For example, referring tenants to credit providers (including credit unions and CDFIs) would likely require full permission while limited permission may be granted for credit broking in relation to hire or hire purchase agreement.
- Making an application. RSLs must complete their applications on the FCA online system “Connect”. An application fee is payable and the fee is lower for applications for limited permission than those for full permission. Current information on the application fee is available on the FCA website.
The FCA is under a statutory duty to make a decision on an authorisation application within 6 months of receiving the completed application or 12 months of receiving an incomplete application (which effectively allows for an additional 6 months to make complete an incomplete application).
Most importantly, RSLs must not start carrying on the activity for which they are apply for permission until they are authorised to do so.
- Becoming a FCA authorised firm. Before the FCA grants permission(s) to a RSL, it must be satisfied that the RSL in question meets certain “threshold conditions” for authorisation.
These threshold conditions consist of the legal status, location of offices and business strategy of the RSL, as well as whether the RSL may be effectively supervised by the FCA, having the appropriate financial resources and appropriately skilled and experienced management to perform the regulated activities in question and that the RSL is conducting its business in an appropriate manner regarding the interests of consumers (i.e. the tenants) and the integrity of the UK financial system.
Once a RSL is authorised, a RSL must comply – on an ongoing basis – with the FCA’s rules and standards, which are set out in its Handbook and related regulatory guides.
The rules applicable to a RSL depend on whether the RSL is authorised with full permission or limited permission and the FCA has indicated that a lighter touch of regulation is applied to RSLs with limited permissions, which includes:
- Pre-approval of individuals by the FCA are generally limited to apportionment and oversight functions – no approved person requirements for most not-for profit providers of debt advice;
- The FCA will take a limited and reactive supervisory approach as well as possible limited thematic work;
- Regulatory reporting to the FCA is limited to basic information; and
- Capital requirements are not applicable to the RSL.
RSLs with full permissions on the other hand are expected to obtain pre-approval from the FCA of individuals (e.g. senior managers and employees subject to the certification regime under SMCR from 9 December 2019) are expected to be approved before they can carry out their functions. The FCA will take a targeted and proactive approach to supervision according to the risk profile of these firms. Fully authorised RSLs must provide key information to the FCA and there are capital requirements for all commercial debt management firms and large not-for profit debt advice bodies.
- Becoming an appointed representative as alternative to authorisation. As we have already mentioned above, instead of applying for FCA authorisation, a RSL may become an appointed representative of a FCA authorised person in order to carry on regulated credit broking activities.
Going down the route as an appointed representative allows the RSL to carry on regulated credit broking activities under the supervision of a FCA authorised firm (as principal), which would ensure that the RSL meets the FCA regulatory requirements in respect of credit broking. The principal will take full responsibility of its appointed representative(s).
As an appointed representative, the RSL will not have a direct relationship with the FCA and the RSL can expect that it would need to enter into a written agreement with the principal that sets out the arrangements between them.
The RSL can also expect that the principal will carry out appropriate checks and due diligence in order to satisfy itself that the RSL is financially stable and that it has achieved, and are maintaining a satisfactory level of competence.
Ashfords can advise you on the law and FCA rules on credit broking, the FCA authorisation application process or becoming an appointed representative. Please contact us if you would like to discuss whether your current referral activities as RSLs may fall within the perimeter of regulated credit broking or other related regulatory matters.
 Article 36C of FSMA.
 These factors collectively constitute the “by way of business” test of whether a particular activity is an activity regulated under FSMA and the RAO.
 Article 72G(3) of the RAO.
 The terms “credit union”, “community benefit society”, “community interest company limited by guarantee” and “registered charity” are as defined in Article 36FA(4) of the RAO.
 The FCA “approved persons” regime was replaced by the Senior Manager and Certification Regime (“SMRC”) on 9 December 2019 for all firms, which are both authorised and regulated by the FCA.