Competition to attract students is growing and Higher Education Institutions (HEIs) are increasingly willing to assist students with the funding of their courses. Particularly applicable to overseas students, HEIs are either allowing students to pay their course fees late or by instalments. HEIs can also introduce students to mainstream lenders such as banks to enable them to obtain funding to pay their fees and get involved in new and innovative student lending vehicles. However, without the necessary authorisation, promoting a financial product is an offence under the Financial Services & Markets Act 2000 (FSMA).
Promotion of financial products aside, it is quite possible that the lending activities fall within the bounds of the Consumer Credit Act 1974 either because the institution is deemed to be directly financing the student, or because the institution is acting as a credit broker by introducing students to other lenders.
HEIs should hold the relevant consumer credit licences to undertake such activity and since the transfer of the regulation of consumer credit activity from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA), it is now imperative that HEIs take steps to ensure that they have received the appropriate regulatory authorisation to undertake these consumer credit related activities.
Under FSMA it is a criminal offence for any person (including entities such as HEIs) to continue a regulated activity in the UK unless they are an authorised person. In respect of consumer credit activities such authorisation would now be granted by the FCA.
Those HEIs that were licenced by the OFT pre-April 2014 were granted interim permissions to continue to undertake such activity whilst seeking full permissions from the FCA via an application process. Most of the HEIs who sought full permissions from the FCA having been licenced by the OFT have now received full permissions.
For those HEIs contemplating involvement in activities covered by the consumer credit act for the first time, the authorisation process can be complex and time consuming.
Once fully authorised, the challenges for HEIs don’t go away. Authorised HEIs are subject to the rules and regulations found in the FCA Handbook and are subject to scrutiny and ongoing monitoring of their compliance with them, something that was not previously a feature.
When the FCA first took over the regulation and oversight of the consumer credit sector, it created a consumer credit department to execute on the oversight and monitoring of the sector that it plans to undertake. After a period of settling in and getting to understand the sector fully, it is only now that we can expect to see real action being taken by the FCA against those consumer credit entities and those related entities such as HEIs, who fail to toe the regulatory line.
One of the main reasons given for the transfer of oversight of consumer credit from the OFT to the FCA was that the FCA is better placed to ensure good customer outcomes from its regular scrutiny and monitoring. Whilst HEIs are increasingly recognising students as consumers since the introduction of the £9,000 tuition fees, they may not always think of their students as consumers as such when they refer them to a lender or indeed provide the credit to pay their student loans themselves, the FCA very much does.The FCA will be concerned to see that students (the consumers) are not adversely affected because of the actions of any HEI and, the actual necessity to take on student debt notwithstanding, do not suffer poor outcomes as a result.
Where student debt is effectively being financed by the HEI either directly or through special purpose lending schemes, the FCA is keen to see that students are afforded the same protections as they would be by visiting a mainstream lender. This means not being subject to penal charges or interest rates and ensuring that repayments are affordable. Even where the HEI is acting only as a broker by referring the student to a mainstream lender, although the intensity of oversight may be that much less, there is an obligation on the HEI to ensure that any loan would be affordable at the time of taking the finance as well as ensuring there are no likely change in circumstances in view that would render the loan unaffordable.
The FCA is now starting to take action against those involved in the consumer credit environment where it believes its standards are not being adhered to and consumers are being disadvantaged.
An HEI demonstrates that it is adhering to regulatory standards with robust documentation. The regulator works on a general principle that something that is not documented never happened. Therefore the availability and quality of documentation available to demonstrate that standards have been adhered to and the situation of the borrowing student has been properly explored is key to this.
For HEIs involved in consumer credit activities, now is the time to make sure that your authorisations are correct and that your processes, systems and controls are as robust as they can be and in line with regulatory requirements. Better to do that now of your own accord than be made to do it when the FCA comes knocking. The FCA has a toolkit of sanctions at its disposal and is not afraid to use them where it feels it necessary.
Whilst the focus of this article is very much on Higher Educational establishments, it is also true that Further Education (FE) colleges extend credit to students (via instalment plans and through deferred payments) and also advise students on finances. Much of what has been discussed in this article is equally applicable to FE colleges as it is HEIs.
We are able to support HEIs (and FE colleges) in setting up procedures and documentation that would meet the requirements of the FCA. This would include when HEIs allow students to pay fees by instalments or to defer payment. We can also advise on how HEIs should manage referral of students to mainstream lenders which is often part of the student services function where students need support with paying fees (for their course or accommodation) and with other costs such as materials and equipment.
We can also test compliance with your processes to ensure that they are being applied in practice and we can provide training to your key staff involved in extending credit to students and involved in advising them on financial matters.
If you would like to discuss this further, please contact Jon Pepper.