The new Lending, Credit and Finance (Bailiwick of Guernsey) Law, 2022 (LCF Law) will come into full effect on 1 July 2023. Below are the latest updates on consumer credit and the provision of services ancillary to credit under the new LCF regime – Part II Licences.
REGULATION OF RETAIL CUSTOMERS
Part II (Regulation of Credit) of the LCF Law creates a new statutory framework for the protection of retail customers who make use of consumer credit and the provision of home finance.
Persons undertaking “credit business” will need:
- a Part II licence; and
- to be regulated by the Guernsey Financial Services Commission (GFSC).
A Part II Licence is only required where credit is provided to a customer:
- who is an individual; or
- which is secured against residential real estate located in the Bailiwick;
- where interest or other charges could be levied; and
- where no exemption is available under the LCF Law or the LCF Notice (see below for links to all the legislation and guidance).
Licensees under any of Guernsey’s other regulatory laws who carry on activities regulated under Part II of the LCF Law will still need to hold a Part II Licence where no exemption applies.
LICENSEE UNDER THE LCF LAW AND THE NON-REGULATED FINANCIAL SERVICES BUSINESS LAW
The LCF Law introduces licensing for the provision of credit, and services ancillary to the provision of credit in relation to “regulated agreements” (for both consumer credit and home finance). This is covered under Part II of the LCF Law. As such, where a business is currently registered to conduct lending or administering means of payment under the NRFSB Law, then it may instead be required to obtain a Part II licence unless what it is doing falls under an exemption.
The Registration of Non-Regulated Financial Services Businesses (Bailiwick of Guernsey) Law, 2008 (NRFSB Law) will be repealed on 1 July 2023, when the LCF Law comes fully into effect. Where a business was licenced under the NRFSB Law their current registration will cease on that date. Most activities currently covered by the NRFSB Law will instead generally be covered by Part III of the LCF Law. Any business which is currently regulated under the NRFSB Law will stop being licenced by that law on 1 July 2023. The excess annual fees already paid under the NRFSB Law will be prorated and the balance returned.
PART II LICENCE
A Part II Licence is only required where credit is provided to a customer:
- who is an individual;
- where such credit is secured against residential real estate located in the Bailiwick;
- where interest or other charges may be levied; and
- where no exemption is available under the LCF Exemptions
The tricky part is trying to work out what this may encompass in real life examples. The FAQs issued by the GFSC help. We have set out some of these below in relation to what is applicable to Part II Licences.
Section 90(3) of the LCF Law notes that for the purposes of this Law the term “by way of business “if that person receives any income, fee, emolument or other consideration in money or money’s worth for doing so.”
There are a number of defined expressions in the LCF Law. For example, the meaning of credit is defined in section 4 of the LCF Law and includes the following:
…the provision or carrying on, to or in respect of a customer (A), under a regulated agreement made with or on behalf of A, of any of the following services or activities:
- credit, including a loan of money, whether in cash or any other form, and any other kind of financial accommodation;
- the sale of goods or services on credit, including hire purchase;
- the hiring or leasing out of goods for more than three months;
- the issue of credit or charge cards;
- any other service or activity or class or description thereof specified for the purposes of this Law by regulations of the States of Guernsey Policy and Resources Committee.
Where credit is provided otherwise than in sterling it shall be treated for the purposes of this Law as provided in sterling of an equivalent amount.
The LCF also defines what it considers “services ancillary to the provision of credit” to be so even if a business does not fall within credit in the pure sense of the meaning, it may fall under this category of services.
The following exemptions should be considered carefully to determine whether or not the need for a Part II Licence can be avoided.
Only Part II activities may benefit from the equivalence exemption. For the avoidance of doubt, Part III FFB, Part III VASP and Part IV platform activities will not be eligible for exemption from licensing via equivalence.
Equivalence is an exemption from the LCF Law licensing regime which may be available to some firms/individuals who are not based in Guernsey and who are regulated in certain other jurisdictions.
These jurisdictions must be designated by the States of Guernsey as having equivalent consumer protections as the Bailiwick of Guernsey’s LCF regime. At present, the United Kingdom is the only jurisdiction anticipated to be deemed equivalent.
So, for example, where a business is authorised by the UK’s Financial Conduct Authority to conduct activities which, within the Bailiwick, fall under Part II of the LCF Law, then it may be eligible for equivalence purposes.
It is not necessary to apply to the GFSC to use this exemption, but anyone wishing to use the exemption of equivalence will need to notify the GFSC of its equivalent status. To do this the entity must submit an Equivalence Notification Form. This form is currently only available by emailing firstname.lastname@example.org.
There are no fees associated with submitting a notification of equivalence.
SECTION 9 – GUERNSEY GOVERNMENTAL ENTITIES
Section 9 of the LCF Law provides that a Part II Licence is not required by:
- the States of Guernsey, the States of Alderney or the Chief Pleas of Sark;
- credit, business, services or transactions of a class or description specified by regulations of the States of Guernsey Policy and Resources Committee; and
- any person or class or description of person specified by regulations of the States of Guernsey Policy and Resources Committee. No such regulations have yet been proposed or published.
(SEE BELOW FOR LINKS TO ALL OF THE GUIDANCE AND LEGISLATION)
As noted in our previous update, there are also some exemptions to the requirement of needed a licence under the LCF Law set out in the LCF Exemptions. Many of these exemptions are sometimes further caveated within the LCF Exemptions itself, so where a business may be covered by an exemption we recommend a review of the LCF Exemptions and the FAQs and to seek further legal clarification.
The exemptions that may affect a Part II licence are as follows:
- Persons who carry out lending to family members.
- Persons who carry out lending to family members, where that entity is wholly owned by related family members (whether or not that credit is extended to the owners of that entity).
- Persons who carry out lending to their registered directors, registered partners, registered shareholders, or beneficial owners.
- Registered directors, registered partners, registered shareholders, or beneficial owners who carry out lending to associated entities.
- Persons who carry out lending to their employees
- Guernsey trustees who carry out lending to named beneficiaries of the trust from which the credit is sourced.
- Persons who carry out lending and are administered by a licensee which holds a licence under the Protection of Investors (Bailiwick of Guernsey) Law, 2020.
- Persons who carry out lending and are administered by a licensee which holds a licence under the Regulation of Fiduciaries Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2020.
- Persons who carry out lending and are administered by a licensee which holds a licence under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002.
- Individuals, who are investors, who carry out lending to administered entities.
- Persons who carry out lending internally, within the group structure to which they belong, where the lending entity which has an established place of business in the Bailiwick of Guernsey
- Persons, whose established place of business is within the Bailiwick, who carry out lending to other entities whose established place of business is also within the Bailiwick
- Entities holding a Part III VASP licence issued under the Law.
HELPFUL GFSC FAQS
The LCF Law and LCF Rules are extensive however the GFSC has also issued some helpful FAQs to help flesh out some of the issues raised by the new legislation. The GFSC recently added a series of FAQs to cover High Net Worth Individuals and Lombard Lending. The FAQs deal with many issues surrounding Part II licensees and may be found here FAQs — GFSC.
UNFAIR CONTRACT TERMS AND CONSUMER PROTECTION AND CONSUMER CREDIT
The initial policy remit of the LCF Law was to bring in consumer protection laws. Whilst the LCF Law covers more than this but consumer protection remains at its core. The LCF Law introduces a new consumer finance regime into Guernsey which is aimed at protecting retail customers who enter into personal credit agreements and loans secured on their residential property.
The Part 6 of the LCF Rules applies deal specifically with Consumer Protection and Unfair Agreement Terms and contains tests of fairness and transparency.
We also note at the time of writing, the States have just approved the Trading Standards (Fair Trading) (Guernsey) Ordinance, 2023 (Ordinance) which is made under the Trading Standards (Enabling Provisions) (Guernsey) Law, 2009, and which purports to make wide ranging provision in the area of consumer protection and fair trading. In large part it makes provision that is based on, and consistent with (subject to necessary modifications), relevant UK legislation. Part of this law will also deal with hire purchase arrangements and consumer contracts. It would therefore appear that hire purchase contracts fall under both frameworks. So, we alert the reader to the fact that they may also have obligations under this new Ordinance when it comes into force. To date there is no indication of when this may be.
LCF LAW AND GUIDANCE – WHERE TO FIND IT?
A copy of the LCF law may be found here. Accompanying Lending, Credit and Finance Rules and Guidance, 2023 (LCF Rules) and a notice with respect to the disapplication of the requirement to hold a licence under section 40 of the LCF Law (LCF Exemptions) have also been issued by the Guernsey Financial Services GFSC (GFSC). The GFSC has also issued the Lending, Credit and Finance (Designated Jurisdiction) Regulations, 2023 which confirms that the United Kingdom is a designated jurisdiction for the purpose of s10(3) of the LCF Law and equivalence purposes. A series of FAQs have also been created to assist with the interpretation and guidance of the LCF Rules and LCF law. They may be found at https://www.gfsc.gg/industry-sectors/lending-credit-and-finance/faqs. These are regularly updated and the most recent ones relate to Lombard Lending provisions.
For further information, please contact:
Jeremy Berchem, Partner, Appleby