THE NPA ROADSHOWS 2014

1. THE NPA ROADSHOWS 2014 UNDERSTANDING FCA REQUIREMENTS Headline Sponsors: Coffee and lunch Sponsor Other Exhibitors

2. Understanding FCA Requirements March 2014 Welcome Nathan Finch, Deputy President of NPA

3. Understanding FCA Requirements March 2014 10.30am Welcome- Nathan Finch, Deputy President of NPA Introduction- Ray Perry, Chief Executive NPA 10.40am ‘Introducing The New Regime’ NausicaaDelfas, FCA Head of Consumer Credit. 11.10am ‘What lies ahead? Key Changes for pawnbrokers’ Ray Watson, Walker Morris 11.40am‘How to Comply- Policies and Procedures’ Stephen Atkins 12.30pm Buffet Lunch

4. Values Fairness and Transparency Professionalism and Excellence Expertise

5. THE NPA ROADSHOWS 2014 UNDERSTANDING FCA REQUIREMENTS Headline Sponsors: Coffee and lunch Sponsor Other Exhibitors

6. Introducing the new FCA regime NPA Conference Kensington, London 11 March 2014 Nausicaa Delfas Head of Consumer Credit Supervision, FCA

7. How regulation is changing 1 April 2014 • The Financial Conduct Authority takes over consumer credit regulation from the Office of Fair Trading • This creates a single regulator for conduct in financial services

8. The Financial Conduct Authority Strategic objective: ensuring the relevant markets function well Operational objectives: promoting effective competition in the interests of consumers securing an appropriate degree of protection for consumers protecting and enhancing the integrity of the UK financial system Our remit: Conduct of c25,000 firms Prudential soundness of c23,000 firms (those not regulated by the PRA) Responsible for c50,000 consumer credit firms from 1 April New regulatory system

9. Your firm’s FCA authorisation – a two stage process • Interim permission registration • Deadline is 31 March • Takes 10 minutes to register online: www.fca.org.uk/clicked If you don't register by 31 March 2014, you won’t be able to legally continue lending money • Full permission application • A more detailed application than the OFT equivalent: • Threshold conditions • Approved persons • Application periods start in October for firms with Interim Permission • Pawnbrokers’ application period to be confirmed at the end of March

10. FCA fees • Application fees when you apply for full permission • Periodic fees every year once you have full permission • Fees based on your business type and your income • Proposed period fees published 31 March

11. How the rules change for your firm • Final FCA rules published on 28 February in Policy Statement 14/3 • From 1 April: • OFT requirements move to FCA Handbook • FCA Rules and Principles will apply – such as ‘treating customers fairly’, systems and controls • Once you are authorised: • Approved persons • Reporting

12. The FCA’s approach to regulation The FCA’s approach will emphasise 5 elements: being more forward-looking intervening earlier tackling underlying causes securing redress taking meaningful action More powers and resources than the OFT – for example: temporarily ban products or restrict sales for up to 12 months ban firms or individuals stop misleading financial advertising impose requirements on firms require skilled person reports

13. What we will focus on • Our aim is for a credit market that works for the benefit of consumers • Proactive supervision of firms will aim to deal with issues and address root causes of problems • Your approach needs to put the interest of your customers at the heart of how your business is run • This is about: • culture • leadership • clear business practices

14. How we will regulate you during ‘interim permission’ • Responding to issues in individual firms • Visits to larger pawnbrokers • Proactive monitoring of financial promotions and contract terms • Thematic work

15. How we will regulate you once you have ‘full permission’ • Our regulation is risk-based and proportionate • The intensity of our approach will depend on your FCA category: C1, C2, C3 or C4 • Majority of pawnbrokers will be in category C4 • Three “pillars” of Supervision: • Individual firm assessments • Reactive work with individual firms • Thematic work across groups of firms

16. Pillar 1: Individual firm assessments • We will regularly assess your firm through reviews/visits • Consider this fundamental question: Do you have the interests of consumers and the integrity of the market at the heart of how you run your business? • Intensity depends on your FCA category

17. Examples of likely areas of focus

18. Pillar 2: Reactive work with individual firms • To deal quickly and decisively with problems • Risks identified through variety of sources • You will have to tell us about issues you find • Use a range of tools to put things right • We prefer to work with you voluntarily, but enforce our decisions if necessary

19. Pillar 3: Thematic work across groups of firms • Examines emerging risks across firms • First thematic project to be announced soon • Any firm can be included in thematic work outside of its regular assessment • We engage with the industry to set the tone and publicise the outcomes of this work

20. Action points for you • Register at www.fca.org.uk/clicked by 31 March for interim permission • Visit www.fca.org.uk/consumer-credit to find out more about how we will regulate you • Familiarise yourself with our final rules (Policy Statement 14/3) • Prepare for what’s new: • High-level principles – such as treating customers fairly • Complaints rules • Reporting

21. THE NPA ROADSHOWS 2014 UNDERSTANDING FCA REQUIREMENTS Headline Sponsors: Coffee and lunch Sponsor Other Exhibitors

22. What lies ahead?The key changes under the new FCA regime for pawnbrokers Presentation to NPA members by Ray Watson 11 March 2014

23. Agenda • Impact of transfer of Consumer Credit regulation to the FCA • Legal framework • Timescales • Key changes for pawnbrokers • Threshold conditions • Approved persons • CONC sourcebook • Supervision and reporting • Appointed Representatives • Enforcement • What you need to do to prepare

24. Timetable • 2014 • February 28th - final rules published • By 30 March – apply for interim permission • 1 April transfer to FCA • 1 July – bespoke HCSTC rules apply • 1 October- end of transitional compliance period • 2016 • By April – all firms to have applied for full authorisation

25. OFT and FCA regimes - Compared (1) OFT FCA (FCA) Framework law (FSMA) Detailed COB rules and guidance in handbook Rigorous authorisation and supervision Authorisation or Appointed Representatives All entities must have a UK presence • Detailed law (CCA 1974 and Regulations) • Supplemented by guidance • Light touch licensing/supervision • All entities must be licensed • No UK presence required

26. OFT and FCA regimes - Compared (2) OFT FCA Personal liability Higher scaled fees based on turnover Regular reporting and disclosure obligations Wide ranging powers Unlimited fines and consumer restitution Price cap for high cost short term loans • Fitness and propriety • Licensing fees relatively low • No reporting requirements • Limited powers • Enforcement - £50,000 maximum regulator fine • No price controls

27. Threshold Conditions • From authorisation onwards • Pawnbroking is ‘high risk’ • Minimum standards required • Legal status • Location of offices • Effective supervision • Appropriate resources • Suitability • Business model • ‘Fit and proper’ test for management • Failure may = variation/cancellation of permissions • Pawnbrokers must advise how value items and charges on redemption

28. Approved Persons Individuals or entities Approved to perform controlled functions Significant influence functions Have considerable sway over how the business is run Subject to significant personal responsibilities

29. Becoming an Approved Person Must be ‘fit and proper’ On an ongoing basis Detailed application process Possible interviews by FCA Personal accountability Subject to disciplinary action/fines

30. The Consumer Credit Sourcebook (CONC) • What is familiar? • Agreements and SECCI largely as before • Advertising /financial promotion too for pawn – (although speed is an incentive) • Adequate explanations (limited for pawn) (4.2.5 (6)) • Post contractual processes/Debt Collection (CONC 6 and 7) • Mental capacity/vulnerable consumers (CONC 2.10) • FOS complaints process (DISP) • Financial crime/AML (EG, DEPP MLRs)

31. CONC 6.6 Pawnbroking Pawn receipts unchanged (s 114(1) CCA) Redemption and sale processes too (section 121 CCA) Record requirements in CONC 6.6.3 – 6.6.9 Replicate existing rules under 1983 Pawn Records Regulations

32. CONC – what’s new? • Definition of High Cost Short Term Credit • Borrower/lender or P2P agreement (not DCS) • APR of 100% or more • ‘Substantially’ repayable within 12 months • Unsecured • NOT home credit, a bill of sale, or an overdraft • Much wider than ‘Payday’ loans • But exempts pawn agreements

33. Bespoke rules for HCSTC • Risk warning on adverts (now simplified) • Maximum of two rollovers • No refinancing unless in consumer’s interest • Limits on use of Continuous Payment Authority • No more than two attempts without contact • No part payments • BUT FCA have made it clear being outside definition will not avoid scrutiny for other short term lenders.....

34. CONC - Supervision Classification C1-C4 Dedicated supervisor or team Prioritisation by risk/consumer harm All firms will be visited by the FCA at least once every 2 years Supervision will be based on level of risk with bigger firms more closely supervised Thematic reviews

35. You can expect a visit... “We will initially be delivering a hybrid supervisory approach to consumer credit firms during the interim permission period. We will focus on the way that firms treat their customers by: conducting firm-specific visits to the largest firms within certain sub-sectors, including debt management, debt collection, home-collected credit, HCSTC, pawnbrokers and credit card issuers. we assess whether a firm is being run in a way that results in the fair treatment of customers, minimises risks to market integrity and does not impede effective competition.”

36. CONC – reporting requirements Every 6 or 12 months, depending on turnover (6 months if turnover £5m+) Regulatory reporting Product sales data Wide scope of information To enhance market understanding And shape future FCA approach

37. Pawnbrokers need to report Fees Revenue Total customers Total number of loans Total number of transactions (each item counts separately) Total value of loans (outstanding and in a given period) Number and value of loans in arrears Average APR Highest APR Complaints (received, outstanding, closed, upheld) Redress paid in response to complaints

38. For reporting purposes “In the case of pawnbroking, each item that is used as security should be counted as a separate loan”

39. Creditworthiness/affordability • Creditworthiness assessment is more limited for pawn • Security is enough provided liability no more than value of article plus interest with no additional charges • But for unsecured loans: • Rigorous affordability checks • Guidance has become rules • Must be able to evidence such tests • Positive obligations to check income/expenditure • Link with reporting requirements?

40. Appointed Representatives An appointed representative (AR) is a person or firm who conducts regulated activities and acts as an agent for a firm directly authorised by the FCA. The directly authorised firm is known as the AR's 'principal'. N.B. lenders who charge for credit provision cannot be ARs, they must be directly authorised

41. AR requirements • A written contract • In prescribed terms • Principal takes FULL written responsibility for AR’s compliance • AR must meet Threshold Conditions • AR must accede to Principal’s supervision • Access to staff, premises, records • Ongoing monitoring • Appointment via online application

42. Enforcement Stronger, earlier regulatory intervention Preventative, proactive Focus on minimising consumer detriment A sea-change compared to the OFT approach

43. Powers of the FCA • Refuse and revoke authorisation • Take civil action • Take disciplinary action against individuals • Impose fines • Product intervention powers • Imposed without consultation for up to 12 months • Prohibit product sale • Render existing agreements unenforceable • Impose a price cap from January 2015 • Prosecute

44. But probably even more important... A change in regulatory attitude “Our message to any company that harms their customers – the clock is ticking.” “Our enforcement teams are already working with the OFT so that we can take action where existing rules aren’t being followed and where we believe that firms are continuing to harm consumers.”

45. Obvious implications for credit firms Costs will rise significantly Record keeping will have to be good Arrangements with agents and third parties will need to be considered carefully to limit risk Senior management will have to be focused on compliance and consumers

46. Wider consequences Market exit Reduction in competition Barriers to entry Higher charges for borrowers Overall decline in consumer detriment Express warning against ‘gaming’

47. Preparation, preparation, preparation • Review of policies and procedures • Role of key individuals to be Approved Persons • Product/process changes • Cost/resource • Training • Monitoring and supervision

48. THE NPA ROADSHOWS 2014 UNDERSTANDING FCA REQUIREMENTS Headline Sponsors: Coffee and lunch Sponsor Other Exhibitors

49. Understanding FCA Requirements Stephen Atkins SA Compliance Management Ltd

50. Skilled Persons Panel • SACM is appointed for Governance, Systems & Controls and Risk to the Panels of the Bank of England, the Prudential Regulatory Authority and the Financial Conduct Authority.