The new Lending, Credit and Finance (Bailiwick of Guernsey) Law, 2022 (LCF Law) will come into full effect on 1 July 2023. We have highlighted some of the FAQs that relate to Part II Licences under the LCF Law below. Whilst we recommend reading the FAQs directly, the points raised may help to navigate through them.
LENDERS AND BROKERS
Existing loans (i.e., those in place before 1 July 2023) will fall within the scope of the LCF Law. This means that from 1 July 2023, those borrowers with existing loans must be treated in accordance with the same procedures and processes that have been introduced to be compliant with the new LCF Rules.
For example, where a borrower makes a complaint about an existing loan, their complaint should be dealt with in line with the relevant LCF Rules around complaints handling.
However, there is no need to re-write existing loan agreements or carry out new creditworthiness assessments, unless there is a trigger event (such as re-financing of the loan).
Even where a book of loans is in run off, the provider will not automatically be entitled to an exemption from the requirement for a licence. However, if the loan book enters run-off before 1 July 2023 the provider may qualify for a discretionary exemption from licensing.
However, the FAQs state that where the run-off is expected to take more than 5 years, the GFSC would not ordinarily grant an exemption and a Part II licence would be required.
If granted, an exemption would last for a maximum of 3 years, after which time the provider would need to renew the exemption. During this period, the provider must follow the requirements of the LCF Rules. However, they would be permitted to make minor changes to loan terms, for the benefit of (and with the agreement of) the customer and to change interest rates in response to changes in the Bank of England base rate.
These are assessed on a case-by-case basis. The discretionary exemption application form can be found on the GFSC website. There is a fee for the application, which is currently £1,270 for a company or partnership, or £570 for an individual.
BUY NOW AND PAY LATER (BNPL) ARRANGEMENTS
Part II covers regulated agreements. These will include the provision of credit where interest or other charges are, or may be, levied. If the BNPL arrangement involves no interest or charges and no possibility for future interest or charges, then it would not meet the definition of a regulated agreement.
However, if it did include potential charges or fees, then it would be considered a regulated agreement and would be covered by Part II of the LCF Law, regardless of the length of the agreement. This would also include agreements that can be switched by the provider into standard credit agreements, in the event of non-payment.
These are regulated payments and would require a Part II Licence.
PROPERTY FINANCE – COMMERCIAL PROPERTY
This will not require a Part II licence unless the premises are also the borrower’s home. Where any credit is secured against the borrower’s business or business premises- this would not be considered a regulated agreement under Part II of the LCF Law but may need a licence under Part III for FSB.
PROPERTY FINANCE FOR BUY TO LET PROPERTY
This is regarded similar to commercial property and would be exempt from a Part II licence requirement.
OVERSEAS CREDIT PROVIDERS
A credit provider who advertises in the UK national press but not in the local press or to local individuals directly may provide services to Bailiwick resident who contact them directly without requiring an LCF Licence. However, where the business sends targeted advertisements to Bailiwick residents and are therefore deemed would be holding themselves out as carrying on business within the Bailiwick and they will require a licence (unless they can use the equivalence exemption).
An Appointed Service Provider (ASP) is a Part II-licensed credit or ancillary service provider, who is appointed to act on behalf of an exempt private lender.
An ASP will be responsible and accountable for ensuring that the exempt private lender applies the LCF Rules and meets the AML/CFT requirements.
If those loans are regulated agreements, then any ASP will need a Part II Licence. However, non-bank “private lenders” may be able to apply to the GFSC for a discretionary exemption from licensing under Part II, provided their lending business falls within certain parameters.
An exempted private lender must:
- make available no more than 2 loans per annum; and
- have a maximum loan portfolio of no more than £2m; and
- comply with all the relevant Rules in respect of their lending to customers; and
- at all times have acting on their behalf an Appointed Service Provider.
Note that the private lender exemption only allows exemption from licensing under Part II of the Law (for the provision of consumer credit and/or home finance arrangements which are “regulated agreements”). So, they may still require a Part III FFB licence, in addition to a Part II Licence.
Discretionary exemptions are assessed on a case-by-case basis upon application, for which there is a fee (£1,270 for a company or partnership, or £570 for an individual). The discretionary exemption application form can be found on the GFSC website.
Please note that if granted, an exemption will last for a maximum of 3 years, after which time it must be renewed.
Note that the private lender exemption only allows exemption from licensing under Part II of the Law (for the provision of consumer credit and/or home finance arrangements which are “regulated agreements”). Therefore, such exemption may not be obtained to exempt any business from the requirement to hold a Part III FFB licence should it require one.
Commercial lending is a Part III FFB activity, and the licensee will need a licence (unless otherwise exempted).
The maximum loan portfolio includes the lender’ entire loan portfolio. For the avoidance of doubt, this includes “regulated agreements” and all other types of lending (such as commercial lending).
For example, if a loan book consists of £0.5m of home finance lending and £1.7m of commercial lending, then, the total loan book is £2.2m. The total loan book would be above the maximum loan portfolio threshold and thus the lender would not be eligible to apply for a private lender exemption.
The particular circumstances of the loan or loans offered will determine which type of LCF licence a lender will need.
If any of the individual loans are “regulated agreements”, and the lender is not eligible for a private lender exemption, they will need a Part II licence (but they will not need a separate Part III FFB licence).
On the other hand, if the total value of loans is less than £2m, the lender may still be eligible for the private lender exemption, in which case they would not need a Part II licence. However, the lender is likely to need a Part III FFB licence for any commercial lending activity.
It does not matter is a lender is a company or a natural person to claim the private lender exemption.
The private lender exemption is limited to £2m for any loan portfolio, this means if two people jointly lend- lending in excess of £2m (not £4m of pooled funds). If loans are carried out jointly and the amount of lending exceeds £2m, then a licence is required for this lending. All parties lending in a pooled fund or separately would require a separate licence unless a company is used to operate the lending, in which case only the company would need a licence.
Retailers who offer credit for goods and services may need a licence as this activity is covered by the LCF law even where the credit is provided by a third-party licensed credit provider.
Retailers who are not motor traders but who do not charge extra for goods sold on credit and have a written agreement with one credit provider, may be considered an “appointed retailer” and would not need a licence themselves. An appointed retailer may only use and promote a single credit provider and must have an arms-length agreement in place with the respective credit provider who deals with everything from accepting the customer for credit, making quotes and organising the lending. The retailer is not allowed to undertake any of these activities.
Retailers who offer interest – free payment terms but who sell the goods at a higher price that those sold without the interest -free credit – will need a licence as this is in effect a cost for the credit. The same applies where late payment fees or interest on late payments is also charged.
Where a retailer is not involved in arranging any loans or quotes but merely passes on the details of a licensed lender or credit broker to a customer- then they will not need a licence.
Where an item is purchased and returned and the retailer gives the customer a credit to use later – then this is not considered “credit” for the purposes of the law.
Where the motor trader sells cars and offers credit, that trader will require a Part II licence for the conduct of services ancillary to the provision of credit. There may be some exemptions.
An appointed motor trader is a motor trader who may offer and promote third party credit from a single provider, effectively acting as their agent.
They do not need to be licensed in their own right, and would not be subject to ongoing fees.
Such arrangements are limited to small firms (whose total value of loans brokered are less than £250k per year). It will also be restricted to simple loan arrangements, and not personal contract purchases or balloon payments. GFSC payments may be allowed between the lender and the motor trader, although difference in charges payments will no longer be permitted under the exemption.
If the appointed motor trader identifies that the total value of loans brokered in that accounting year will exceed £250k, they will be required to apply for a licence.
The lender will be responsible for the conduct of the motor trader, ensuring that the relevant LCF Rules in relation to credit provision and regulated agreements are complied with. There will need to be a written agreement in place between the lender and the appointed motor trader.
The lender will be required to provide the GFSC with information regarding its arrangements with appointed motor traders as part of its annual return.
The lender will be responsible for the arrangement and be required to provide appropriate training and supervision of the motor traders with which it has these arrangements.
To be clear, motor traders will be allowed to pass the contact details of licensed credit brokers and/or licensed credit providers on to customers (and could charge GFSCs for doing so), without being an appointed motor trader, or being otherwise licensed. As long as the motor trader does not provide the customer with advice, collect information, arrange the agreement, or assist the customer in completing any forms etc, then passing on contact details would not constitute regulated activity.
While appointed motor traders are not licensed and are not directly accountable for compliance with the LCF Rules, the GFSC may wish to visit them to understand how responsibilities are managed by the licensed credit provider.
Where a motor trader sells a car on credit they may need a licence as the activity falls within the scope of Part II of the LCF Law. They will not need a licence where they can show the following:
- they have not charged a higher price for the motor for arranging the finance;
- they have a written agreement in place with one Part II licensed (or equivalent) credit provider;
- the total value of loans brokered must be less than £250k per annum; and
- they must not arrange complex transactions (such as balloon payments or personal contract purchases.
However, where they do charge a higher price for something paid for by some credit arrangement or even interest or a fee upon late payment, then a licence under Part II will be required.
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