Credit control: new financial considerations11 October 2016
There are changes to the regulations regarding the introduction of credit facilities afoot, and the effects of the new legislation will surely be felt within professional audio and elsewhere within the production industry. Paul Robson of Medialease is in a better position than most to explain the situation.
What exactly are the legislative changes that we should know about?
Paul Robson: The Financial Services and Markets Act 2000 created the Financial Services Authority (FSA) as a regulator for insurance, investment business and banking, and the Financial Ombudsman Service to resolve disputes as a free alternative to the courts. The Act was considerably amended by the Financial Services Act 2012 and the Bank of England, then subsequently by the Financial Services Act 2016. It’s the latter set of amendments that most directly affect anyone who introduces clients to third-party financiers.
It has now been decreed that any firm or individual who carries out a regulated activity in the UK must be authorised by the FCA (Financial Conduct Authority), unless they are exempt. Regulated activities are those described in the Act and, among others, specifically include the introduction of certain types of client to companies who may potentially provide credit facilities.
In layman’s terms, what does that mean to anyone in our business?
If a company sells equipment to a sole trader or partnership with less than four partners and introduces them to a third-party finance provider to assist them with the purchase of equipment, then the seller must to be regulated by the FCA. Henceforth, the very act of making an introduction is considered to be the act of credit brokering, even if the seller does not receive a commission for the introduction. In short, unauthorised introductions cannot legally be made to the types of client described above.
What is the reasoning behind the new measures?
The reason they are clamping down is to avoid more ‘mis-selling’ sagas, many of which have been well-documented. Given the specialised and somewhat isolated nature of our business one might think that the chances of being caught are slim, but it’s worth remembering that the punishment for making unregulated introductions is pretty severe. If the FCA finds you guilty of unauthorised credit brokering it will be considered illegal and culprits could be dealt with accordingly.
Can you be more specific about who this affects and what type of transactions fall under the purview of the Act?
Firstly, as previously stated, this only applies to introductions where the purchaser is a sole trader or in a partnership of less than four people. So, at least for the time being, sellers can continue to refer limited companies without needing further accreditation. Additionally, if credit is offered as 0% interest for 12 months or less then it doesn’t apply, and various professions (such as solicitors, accountants and actuaries) who run regulated activities alongside their main businesses are exempt from the Act.
If, however, none of those exceptions apply to any company that regularly sells to sole traders or small partnerships and who wishes to stay within the law when introducing a buyer to an asset financier in order to make a sale, then they must be either a/ regulated by The FCA or b/ an appointed representative of a business that is regulated by The FCA.
Can you offer any guidance for those wishing to become regulated under the Act?
From personal experience I can say that getting authorisation from The FCA is a tortuous process. It can take months of disclosures, financial revelations, audit checks and lengthy procedure writing then once you’re approved, an ongoing monitoring process begins.
Are there any legal and viable alternatives?
Some asset finance companies (including Medialease) have been through that difficult process, are now regulated by the FCA and can potentially appoint parties as representatives. This does not tie the seller to any broker or finance company at all, even if finance is subsequently arranged to facilitate the transaction – all the seller has to do is fill in a form then follow some simple rules and a suitably accredited finance provider will essentially ‘lend’ you their regulatory permissions.
‘Simple rules’ – that sounds ominous – how hard is it really?
There are some fairly stringent stipulations but nothing that most companies wouldn’t do as a matter of course. Once completed correctly the accredited finance provider will then assume the responsibility of authorisation on behalf of the seller. For reputable and honourable resellers there is a viable and legal option.
So, in summary?
The legal framework under which introductions may be made to a finance company have changed. All resellers need to be aware of what is going on and should ensure that they understand how this affects their business but the option to become an appointed representative of a reputable provider who is suitably accredited under the Act is potentially there if needed.