Let's recap on what the rules for authorisation are.
Brokers introducing regulated business need, as a minimum, to have permission to conduct "credit broking" in accordance with Article 36A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO). It is a common misconception that they do not need to have permission where the agreement is "exempt", in other words, where the deal involves a sole trader or partnerships of 3 or less and the credit is for more than £25k and used for business purposes. That too requires a broker to hold the relevant authorisation from the FCA, unlike the ultimate funder who need not be authorised to write such exempt business (but bear in mind the funder still needs to ensure that their treatment of the debtor and the terms of the credit agreement do not give rise to an unfair relationship under s140A of the Consumer Credit Act).
So what happens if the broker isn't duly authorised?
Under section 27 of the Financial Services and Markets Act 2000 (FSMA), a regulated credit agreement made with a borrower who has been introduced by an unauthorised broker is unenforceable against the borrower. However, all is not lost, (or at least that was the position prior to the recent case of Plaxedes Chickcome and 44 others v the FCA and Barclays Partner Finance as interested party [2018] UKUT 258 TCC (the Chickcome Case). Section 28A of the FSMA allows a party to make an application to the FCA for a notice to allow the agreement to be enforced, notwithstanding the lack of authorisation on the broker's part. The FCA may only grant such an order where they are satisfied it is just and equitable to do so in the circumstances of the particular case.
In the Chickcome Case the FCA had made such a validation order but the borrowers felt aggrieved and referred the matter to a Tribunal for consideration. In the case, a number of regulated credit agreements had been entered into by the funder, but it transpired they had been brokered by an unauthorised broker, resulting in the agreements being unenforceable against the borrowers who would then be entitled to have any money they had paid, refunded under those agreements. The numbers are significant - 1444 regulated credit agreements and a total amount payable of £47m.
The FCA made the validation order, considering that, in their view (a) the breach was unintentional; (b) there had not been consumer detriment caused by the fact that the broker was not authorised; and (c) steps had been taken to prevent a recurrence of the breach. That all seems fair enough and indeed what a funder might have expected in the circumstances.
The question of consumer detriment
The borrowers argued in the Chickcome Case that they had suffered detriment arising from the brokers conduct, albeit that detriment didn't arise from the broker not being authorised in and of itself. It should have been taken into account when the FCA contemplated issuing the validation order.
The borrowers alleged, amongst other things, that:-
- Proper credit assessments weren't carried out;
- Terms of the regulated agreements weren't explained;
- Borrowers were not given adequate time to consider the terms of the agreements before entering into them;
- They were pressurised into signing;
- Vulnerable customers were improperly treated;
- Commission arrangements were not adequately disclosed.
So were the FCA bound to look at the wider picture in assessing whether it was just and equitable to enforce an otherwise unenforceable agreement? Yes they were. How the broker and funder had conducted their business in the selling process relating to the relevant agreements was a factor to be taken into account. The prejudice caused by the broker being unauthorised needs to be weighed up against evidence of consumer detriment more generally. The FCA is now reconsidering its decision in the Chickcome Case.
Implications for the Market
It is more important than ever to ensure that any broker you deal with has the requisite authorisation from the FCA to carry out regulated business. Check the FCA Register and do so frequently, not just at the outset of your relationship, and remember to do so too when writing exempt business. The Chickcome Case shows that the FCA won't automatically grant a validation order in relation to agreements that aren't enforceable due to lack of authorisation; they have a duty to consider the wider position including consumer detriment which is unconnected to the lack of authorisation. Indeed, following the case, the FCA may be more cautious generally about granting validation orders.
The Chickcome Case is also a gentle reminder to all funders writing broker introduced business to ensure they have a handle on the way business is being conducted by brokers. It demonstrates that authorisation status in isolation isn't enough and ongoing monitoring and assessment of conduct, complaints volumes and portfolio metrics are necessary to ensure all parties don't fall foul of the rules.
