Is your in-house monthly direct debit subscription scheme now exempt from the Consumer Credit Act?

Does the recent Financial Conduct Authority (FCA) change allowing some 0% instalment schemes to be unregulated mean your in-house monthly scheme is exempt from the Consumer Credit Act and all its implications?

Steve Taylor, sales director at the leading golf membership finance provider, Fairway Credit, sheds some light on the situation

Clearly, the ability of any golf club to offer an instalment scheme which is exempt from the Consumer Credit Act’s (CCA) scope is hugely welcome.

Most schemes are an accommodation to clubs that just reflect a service they wish to provide to their members. Becoming embroiled in the spectre of full regulation either directly, or via an appointed representative status did seem daunting for many and we welcome the move.

But whilst the Financial Conduct Authority (FCA) is sensitive to these accommodation schemes it is still focused on ensuring the correct customer outcomes and the concession comes with some fairly clear guidelines, including:

1. There must be no interest or other charge for credit (for example there can be no admin fee)
2. There can be no more than 12 repayments per loan
3. The total period of the agreement has to be less than 12 months.

So whilst the changes are welcome it is still a complex area where clubs need to get it right – the penalties for falling foul of the regulator can be severe. So, you must take care how you run your scheme or be protected by those who run it for you. When the FCA says there must be no fees or charges, interest or an administration fee are fairly obviously excluded, but what about implied interest? For example discounts for paying in full.

To try and help clubs find their way through the maze of issues here, Fairway Credit has produced a simple chart which shows how you can offer instalments either as an FCA-authorised club, or without authorisation. Please note that this article is provided for guidance only and clubs should of course ensure they seek appropriate legal advice from their own advisors on their schemes.

The main decision you need to make is whether your scheme is designed to generate income for the club from the member. If you are happy to earn nothing from the member under an instalment scheme and you and the scheme meet the other tests, then it is NOT necessary for the club to seek FCA authorisation either in its own right or as an appointed representative of another regulated firm in order to offer credit – whether run in-house by the club or through a third party funder like Fairway Credit. However, if the instalment scheme offered to members involves credit broking (which usually means any form of income to the club, for example the club receives a fee or interest direct from the member, or the club receives any form of commission from their third party provider), then the club needs FCA authorisation.

What about the suggestion that clubs can earn income by simply inflating their membership fee to all members then offer a discount to cash payers?

Fairway Credit has reviewed this with Eversheds (one of the world’s largest corporate law firms and a leading UK Consumer Credit Law firm) and we both conclude that the charging of any interest (including implied interest) or fees would take the credit agreement outside the exemption. Let’s work through an example:

A club offers its members the option to settle their membership subscription of £1,000 in 10 equal instalments of £100, or pay the full sum upfront at a discount, say £970. The instalment payer is clearly being charged extra for paying monthly – however it is dressed up. In our view this equates to a quasi / implied interest charge of £30 and takes the agreement outside of the exemption which means that clubs which offer such an agreement would need FCA authorisation.

We know there are alternative views in the marketplace which is why Fairway Credit paid for this legal advice from such a prominent firm.

There was an interesting e-mail sent by the FCA on March 18 to all clubs with interim FCA authorisation which was helpful in clarifying its thinking. In it, it said that the provision of instalments should (sic) ‘involve no charges or interest (e.g. there can be no admin fee)’. I think this leaves very little room for interpretation.

The FCA is currently undertaking roadshows around the UK offering updates and guidance on the credit rules. It talks about ‘treating customers fairly’ and with ‘honesty and transparency’ in any dealing with clients on credit matters. It is difficult to see how differential pricing sits with this aim, but clubs must decide themselves on which interpretation seems appropriate.

Leaving the regulations aside what else should clubs be considering if they elect to move to an in-house scheme that is exempt from the consumer credit regulation?

1 CASH FLOW IMPACT

Moving to a ‘no cost to member’ instalment option will be attractive to many members, clubs should expect to see a substantial proportion of members take up the offer – why wouldn’t they?

Sounds great, and in many ways it is, the availability of instalments assists with securing and retaining members and has been at the heart of Fairway Credit’s success. So what does that do to club cash flow if you run your scheme in-house?

The diagrams below show the likely impact of introducing such a scheme on a club’s finances. We typically see 25 percent of members take up Fairway Credit (diagram 1) when it is available at their club, which leaves 75 percent of membership income coming into the club at or around renewal time, with the balance coming from Fairway Credit at the end of the following month. Move to in-house interest free and we would expect that proportion to swing massively, diagram 2 shows 75 percent take up but we think it could be even higher in many cases. So now the club gets just 25 percent of membership fee income at the start of the year and the balance drips into the bank at about seven percent per month – a huge reduction in cash balances. At March 1 this is £341k for a typical £500k subscription club, and across the remainder of the year cash flow will be down an average £170k – which may mean having to defer some important capital spending until later in the year.

2 DOCUMENTATION

The lack of requirement for a regulated credit agreement is a blessing but clubs will still need to introduce appropriate documentation to facilitate an in-house scheme. Some form of direct debit authority / agreement with the member, as well as a letter suite to advise members of collection dates (in line with BACS rules), default processes and so on.

3 ADMINISTRATION

As well as needing to establish (and comply with) BACS arrangements with their bank / service provider, clubs will be responsible for handling collections, defaults, monthly membership account reconciliations and member queries.

So should you become an appointed representative of a regulated firm to avoid having to get authorisation from the FCA?

‘What for?’ says Steve.

If you aren’t looking to earn from a scheme and don’t carry on any other regulated activity you are already able to structure yourself outside of the consumer credit regulation, so don’t require FCA authorisation. So why do you need to be an appointed representative?

Let’s be clear about what appointed representative status means and what it may be able to do for clubs. Appointed representative status basically allows a lender which holds full FCA permission to appoint the club as its representative, which means the club performs regulated activity under the authorisation of the lender, rather than seeking its own FCA authorisation. The club will need to strictly follow the guidance that the lender gives it and this is likely to be subject to routine audits to make sure this happens. All of the regulated activity is the responsibility of the lender in such cases, which is why the audit process is so important.

A lender needs to be fully authorised by the FCA to lend money to be able to make their business introducers appointed representative (that’s the golf club in this case). No instalment provider in the golf sector has this level of approval at this point, so currently no club is acting as an appointed representative. Fairway Credit is actively considering whether it will appoint appointed representatives and whether this is appropriate for those who do wish to earn commissions and we expect to make that clear in the coming months.

Fairway Credit already provides a ‘non promoted’ product which means that provided clubs don’t promote or carry out any other regulated activity they don’t require to be FCA authorised for their members to enjoy the benefits of an instalment scheme. Since launch in 2013 over 500 clubs and other institutions have taken advantage of the benefits this product brings.

So in summary, we believe that the recent extension of the exemption rules by the FCA is a welcome move and we are well placed to ensure that clubs can benefit from this without needing to take the hit on cash flow, or the costs and hassle of the administration. Those clubs currently running in-house schemes where interest, fees or ‘implied’ charges are part of the scheme, should consider their positions very carefully in light of the recent changes and communications from the FCA.

For more information, tel: 01372 746073, email leisure@pcl.co.uk or visit www.premiumcredit.co.uk