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Debt management companies suffer in the Tribunal

January- April 2016

Over the course of recent months, there have been a series of interim permission cases in front of the Upper Tribunal concerning debt management companies[1].

The background to this is that, before April 2014, firms carrying on consumer credit activities, which includes debt management activities, were authorised and regulated by the OFT.  Responsibility for the regulation of consumer credit was passed from the OFT to the FCA as from 1 April 2014.  Under the relevant Order, a firm which immediately before April 2014 held an OFT licence for consumer credit, automatically acquired on 1 April 2014 interim permission from the FCA. The effect of the Order was that a firm would lose its interim permission unless it applied for Part 4A Permission by a date specified by the FCA.  

There have been a number of cases over recent months concerning debt management companies that received Decision Notices refusing their applications for Part 4A Permission.  The FCA's view was that the relevant Order meant that the giving of the Decision Notice automatically terminated the interim permission so that, even if the company referred the matter to the Upper Tribunal, its interim permission would automatically end and it would (without more – as to which, see below) not have the right to carry on its business at that point. The case of PDHL Limited v. The Financial Conduct Authority [2016] UKUT 18 (TCC) was concerned with whether the FCA's contention was correct. Or, whether instead, the interim permission continued pending final determination. The Upper Tribunal agreed with the FCA. It found that the effect of giving the Decision Notice was that the interim permission did lapse.  It commented that system that had been put in place by Parliament was in deliberate contrast to the situation that applies where for example there is a decision to cancel a firm's Part 4A Permission or a decision to refuse an application for a Part 4A Permission where no interim permission exists.  

That is not an end to the matter. PDHL, and subsequently companies in a series of other cases, have applied to the Upper Tribunal seeking an order that the effect of the Decision Notice be suspended under Rule 5(5) of the Rules of the Upper Tribunal, pending final determination of the matter.  Rule 5(5) provides amongst other things that the Upper Tribunal has the power to suspend the effect of the Decision Notice if it is satisfied that to do so would not prejudice the interests of any persons (whether consumers, investors or otherwise) intended to be protected by [the Decision Notice]....

As for the general principles to be followed in applying Rule 5(5), the Upper Tribunal has in all of the cases broadly adopted the test laid down in Walker vs. FCA (FS) 2013 (0011). We will not repeat here all aspects of the test. Broadly, it is important to note that the Upper tribunal has determined that the burden is on the applicant to satisfy it that the interest of consumers will not be prejudiced.  Further, the Upper Tribunal is not obliged to grant a suspension if it is satisfied that to do so would not prejudice the interest of consumers, but it has a discretion, and it will carry out a balancing exercise in light of all relevant factors.  In all cases to date, the Upper Tribunal has exercised its discretion not to suspend the effect of the Decision Notice. 

Comment

The wording in the Order about the effect of the giving of a Decision Notice is pretty clear. In that sense, it should be no great surprise that the Upper Tribunal found that interim permission automatically lapses. The reality, however, is that it may well be somewhat more of a surprise to consumer credit firms needing to apply for Part 4A Permissions, who may well not have worked through the impact of a Decision Notice.  

This is no small issue. The FCA took over responsibility for the regulation of 50,000 consumer credit firms as from 1 April 2014. Whilst many of them may not be applying for Part 4A Permissions, many will be. To those with established businesses over many years, the impact of an automatic termination on the giving of a Decision Notice could be devastating, especially if, as with the cases discussed above, they do not properly have their houses in order to be successful in a Suspension Application.

More cases will no doubt follow. The FCA made directions setting out the application periods for different categories of firm based on various factors, including the level of risk they pose.  Debt adjusting and debt counselling were regarded by the FCA as higher risk activities and those are the cases that have been coming through. We shall have to see what further Decision Notices are given for consumer credit firms and whether those firms will be apply to successfully suspend the effect of the Decision Notices. Or even, whether any may successfully make out an argument that the automatic lapsing of the interim permission as above is in breach of their civil rights.