Retailers and consumer credit – the need for regular check ups

Many businesses allow their customers to purchase goods or services on credit.  While this often makes sense commercially, the regulatory implications of doing so are sometimes overlooked.  It is very easy for non-financial services businesses to find that they are inadvertently carrying out a credit-related regulated financial service or activity. The consequences of doing so can be serious.

If a business does not have the correct regulatory status, then it can be committing a criminal offence if it enters into regulated credit agreements as lender by way of business. Depending on the circumstances, it can also be a criminal offence to introduce prospective borrowers to potential lenders.  An additional potential consequence is that the relevant agreements may be unenforceable.

With this in mind, some businesses apply to the Financial Conduct Authority (FCA) for authorisation of their credit-related activities.  Others, while not FCA-authorised themselves, work closely with firms that are FCA-authorised in relation to the provision of credit. 

Other firms ensure that the credit agreements that they enter into are exempt agreements rather than regulated credit agreements.  (It should be noted that introducing prospective borrowers to potential lenders can be a regulated activity even if the resultant agreement is not a regulated credit agreement.)

There are various types of exempt agreement.  Not all types of exempt agreement will be available in all situations.  Even where it is possible to use a particular category of exempt agreement, care must be taken in the drafting of the relevant agreement.  In particular, it will usually be important to consider the provisions governing: interest/charges, duration and number of payments.  It is also important to bear these points in mind when amending these agreements.  Problems often arise when staff turnover means that a business loses the institutional memory regarding why a particular agreement has been drafted in a particular way. When this happens people can update agreements and, without realising that they are doing so, amend them in such a way that they cease to be exempt agreements. 

If a retailer is not 100% sure of the regulatory status of its credit arrangements, then that retailer should arrange a regulatory review of those arrangements.  Such a review may be able to provide peace of mind that the relevant activities do not amount to regulated activities.  If problems are identified then action can be taken to put things right before the problem becomes any larger.

Please contact Richard Ellis or William Garner if you would like to discuss a regulatory review of your business’ credit arrangements.