Ever since we first hailed the IP exclusion from the consumer credit licensing requirements in April 2014, we have stood by and watched some other commentators try to cast doubt and confuse matters. That first article contains a now-broken link to ICAEW’s excellent advice on the topic. The IPA has recently released its own brilliantly clear version that essentially repeats what we have been saying, but I have not put the link to that here, or found a new link to the ICAEW advice, as they seem to have a habit of changing their page addresses just after I link to them, so that I spend more time answering queries about the link than the article!
We still hear that at least one consultant is trying to drum up business by scaremongering and there are also mutterings from others who would like the exclusion to go further than it does. As a result, we have pulled together content from our bank of emails on the topic over the past 9 months and tried to come up with a definitive view. It may not be one that you like, and it may not allow you to do everything that you want to without obtaining a consumer credit licence (hereafter referred to simply as a “licence”), but it should help clarify the position for anyone who is still uncertain as to where they stand under the exclusion and also debunk a few myths about the DPB exemption along the way.
Let’s start with a summary, albeit one that is a little simplistic: if you are just working as an IP, you do not need a licence, but if you are doing work that goes beyond that covered by acting as an IP, then you may need one.
The long answer follows, made up from an amalgamation of emails that we have sent to other IPs over the last few months. As the regulatory guidance and our knowledge in this area has developed Gareth, Mike and I have had some differences of opinion over the detail, but this now represents our combined view:
The legislative exclusion for IPs was designed to avoid IPs having to be licensed and as long as you are acting “in reasonable contemplation of an insolvency appointment” you are excluded from the licensing regime. As a consequence, when an IP identifies that an IVA is no longer a reasonable option, then you can refer the case to someone who has a licence, as long as you do not give advice that would require you to have a licence. If you set it out for the debtor that you are not giving advice, but you are referring them to someone who is licensed to do so, and you fully disclose any commission or referral fee, then you are not acting as a broker and are merely completing the formalities at the end of your involvement, which up to that point did not fall under the licensing regime. If you are passing the debtor on to another company, your letter to the referred company on introducing the debtor should make it clear that you only operated within your IP exclusion and it will be for them to advise the debtor fully in accordance with the terms of their licence.
If you are faced with such a situation, indicate to the debtor that since an IVA is not appropriate, then they need the advice of a finance broker to decide what other option is most suitable for them, whether bankruptcy, a loan or other financial product, and then give them the names of the finance brokers that you refer debtors to. That way you are not providing advice to the debtor other than advice of a general nature, i.e. that an IVA is not appropriate, and you are not credit broking and so do not require a licence. If you receive a commission for such referrals then you need to disclose that to the debtor.
So, to make it absolutely clear, you cannot advise a debtor to go bankrupt. This may seem to you as if you are acting as an IP, but the FCA view is that unlike an IVA where you become nominee and, usually, supervisor, in a bankruptcy you are less likely to be appointed trustee and cannot therefore claim to be “acting in reasonable contemplation of an insolvency appointment”. The speaker from the FCA that spoke at the IPA Personal Insolvency conference at the end of last year said that the IP exclusion only operates where you are acting “in reasonable contemplation of an insolvency appointment” and in their view, because you do not normally go after the bankruptcy appointment, advising a debtor to go bankrupt and showing them how to do it is not covered by the IP exclusion. At the risk of upsetting you, I agree with him. The way that the exclusion was drafted was to allow IPs doing their normal jobs to be excluded. If IPs want to do other non-IP work in related fields they need to comply with the requirements of those areas. So, if an IP wants to run a secured lender, he needs to get FCA clearance, pass the relevant exams and subject himself to full FCA monitoring. Similarly, if an IP wants to set up a general debt advice service that makes money from assisting with DMPs, bankruptcy petitions, etc. that is not IP work and such work will need a licence. The current wording does make bankruptcy advice part of the consumer credit licencing requirement, but if they tried to re-word the IP exclusion to cover it, it would allow too many of the non-IP, non-regulated bankruptcy sharks to take advantage of it. Although it causes some difficulties for IPs, it is safer for vulnerable debtors if anyone helping them to make themselves bankrupt has to be licensed.
Having said that, the FCA recognises that IPs are highly regulated professionals and they are not hunting trouble, so if, as a non-commercial, i.e. pro bono, rare event, you point out to a debtor that an IVA really isn’t suitable for them and they decide that they would rather go bankrupt, you would not be strung up for helping them with some of the procedural stuff and giving a bit of guidance on filling out the forms. The more often you do it, and especially if you charge for it, the more likely you are to have to get a licence. The licence is there for those who are doing that sort of work and if you don’t want to get a licence then you have to avoid undertaking such licensed work.
Although recommending bankruptcy and making money out of helping with petitions would require a consumer credit licence, you can still do all of your SIP 3.1 obligations without one, and you have options if an IVA looks inappropriate, as long as you avoid over-stepping the line.
Some commentators have suggested that you may be covered for marginal work by the Designated Professional Body (“DPB”) regulations, but as we explain here, that really is not an option. Under the old OFT regulated consumer credit regime then all of the main regulators had a group licence to cover you. Under the new FCA regime then there is a DPB regime whereby the FCA devolve responsibility for regulating the licensing regime to the DPBs. As part of that DPB regime, those practices regulated by a DPB, which includes the ACCA and ICAEW, can undertake regulated work, such as credit broking, where such work is incidental to the business of their practices. There is no definition of what is meant by “incidental to the business of the practice”. Our original thought was that it could be related to the level of fees received from that source, and the proportion of such work to that of the practice as a whole, or it could be related to the proportion of your personal business that results in that solution. However, the FCA has said that it does not consider that the DPB regulations would apply to an IP.
Whilst the intention was to exclude IPs from the regulatory regime, the FCA’s indication that the DPB regime does not apply to IPs means that the only way to be absolutely sure that you do not fall foul of providing advice without a licence is to avoid doing so once you determine that an IVA is not appropriate. If you cannot avoid giving advice, provided that you only undertake a limited number of such cases each year on a non-commercial basis, the FCA has made it clear that they are not hunting for IPs who accidentally stray over the line every now and again in a genuine attempt to help a debtor. However, if you provide such advice on a regular basis, or approach it as a commercial solution then you would be at greater risk of committing an offence. Ironically, this could lead to situations where you cannot advise a debtor further, but an accountant in general practice, who could well be covered by the DPB regulations, could give that advice.
One client gave us some examples and I responded to say how I thought each one should be dealt with. Please allow for a bit of bias, based on our interpretation of the current guidance, as we think that the intention is to allow IPs to operate outside the system. I have set out the examples in normal type with my responses in italics:
1/ Pre appointment – what happens when I realise that this is not going to be an IVA and I am advising them on bankruptcy or a debt management plan – do I say I cannot help them anymore and to go and speak to someone else (but I cannot recommend anyone as this may be construed as brokering)? Alternatively what if an IP is advising a director on his company with a view to a liquidation or CVA and the question of PGs and overdrawn directors loan accounts come up together with other consumer debts (a lot of directors/company owners take personal consumer loans to fund a business) does the IP, who knows he is unable to get an appointment out of it, say sorry can’t advise you on this go and see someone else (but not who)?
I’ve split this into two because I think that they are different issues.
My argument in the personal IVA case where you decide it may not be an IVA is that as long as you are acting “in reasonable contemplation of an insolvency appointment”, then you are fine. When you get to the stage where you are sure that you cannot help, how you refer the individual would, in my opinion, decide whether you are acting as a broker. If you decide that the person needs help to go bankrupt or should enter a DMP or DRO and you send them to another individual for that procedure, as long as you just refer them to a licensed firm without specifying a solution and make it clear that there are other providers of the same service then you would not be credit broking. If you tell the debtor that you are not able to recommend an IVA, that some other, possibly non-insolvency, solution may be more appropriate, but that you do not have the licence necessary to advise on those options, so you are referring them to someone who has, I don’t think you are broking. You are simply passing the debtor to someone who has a licence and can help them.
I don’t really see the problem with the corporate case. If the IP is dealing with a company it is outside the scope of the Consumer Credit legislation. If the director wants personal financial advice then the IP can initially help, subject to his own ethical checks and subject to doing so in “reasonable contemplation of an insolvency appointment”. So, he can initially help because an IVA seems possible. If he clearly rules an IVA out than he is back at the point above and how he refers the director would have an impact. I have even heard of a case where I think the director eventually settled a personal claim from HMRC, most of which was dealt with by the IP under the exclusion, as it was expected that an IVA would be needed to tie it up. In the end, an IVA was not needed. The proposals would have been to sell the debtor’s house and pay money to HMRC, but the property sold more quickly than expected and HMRC agreed to take the same money as a full and final settlement without formalising it in an IVA. Right up until they shook hands on the deal, the IP was operating in reasonable contemplation of an IVA.
2/ What if someone might need an IVA to deal with a £40k debt, but I think that the debt may be wrong, possibly even not due at all. My instinct has always been to help these people on a pro bono basis – do I now tell them I cannot and go and see someone else who will probably charge them?
I think you can still help the debtor “in reasonable contemplation of an insolvency appointment”, but you’ll need a detailed file note to justify it. If you write the file note as “this is not an IVA and I should be licensed”, then clearly you need to be licensed and you’d have to drop it and walk away if you did not have a licence. However, if you write it as “this is a potential IVA, but I need to do more work to establish whether it is or not”, then you can continue to work on it under the IP exclusion until you are no longer looking at it in reasonable contemplation of an insolvency appointment.
3/ Also if I charge a drafting fee for an IVA – am I covered by the IP exemption? – I have not been appointed formally as a Nominee and the work is with a view to taking the appointment.
Yes. Any work done in reasonable contemplation of an appointment is covered. I would say that it covers the points above as well, but drafting is even more certain.
4/ Post Appointment – one example would be with the remortgage clause in an IVA – the expectation is that the debtor will see an independent financial advisor or a mortgage broker. What happens if the debtor asks me if I know anyone I can recommend – to give them a name (even though I do not make any money out of it) would be brokering. Do I just say no?
You should just say no, but that is not the upshot of the new rules, as it is what you should always have been doing. You can only give mortgage advice if you have jumped through all of the FCA’s secured lending related hoops and a mere licence would not be enough. If you want to qualify as a mortgage advisor, you could. I am sure that the CeMap1, if that is still the exam of choice, will seem a bit easier than JIE, but it is a whole specialism of its own and I am really not qualified to comment further.
5/ Post Release – There is a big issue regarding creditors not updating their credit files following the completion of an IVA to correctly reflect the ex-debtor’s circumstances. Someone may come back to me some 2 years after the completion of their IVA to say that defaults are still being registered on their credit file by a creditor who was bound by the IVA. Getting involved is Credit Repair and I am no longer appointed as office holder. Again do I tell them to go away and not help (this could have serious issues in respect of complaints being made against me – I had told them the IVA would settle their debts but the creditors say not).
I don’t think that you are doing Credit Repair. I think that you are still dealing with matters arising from the IVA and are fine. You may not be in office any more, but you are tying up loose ends that arose from the appointment and that the appointment should have addressed. It would only be fresh work if one of the debts or listed defaults was a post-VA liability that required some sort of fresh solution. There, I would refer you back to 1/ and say that you are initially acting in contemplation of IVA, but may subsequently either drop it (if the debtor just does a deal) or refer it on to someone who has a licence.
I have answered all of the examples as if they were clear cut scenarios and, as you and I well know, they won’t be! Add into that the commercial considerations involved and you may decide that it is worth getting a licence. It probably depends on how many times you expect to need it and whether the money you make from informal advice and referrals covers the cost. You could even make a less commercial decision and get the licence, just so that you could do the work without having to justify it each time. The problem with that is that once you get the licence and operate within the FCA’s regulations, you will also be subject to their regulatory regime and scrutiny, much of which is aimed at firms who may not have other regulators, so there is likely to be a lot of duplication and potentially even conflict with what your insolvency regulators require.
The IP exclusion was negotiated to allow those who are already closely regulated by the various insolvency regulators to continue to operate outside the FCA regime. It was worded in its current form to avoid it being stretched by more commercial firms to cover non-IP work. It was also worded to stop IPs expanding into areas that are not covered by their insolvency licence and therefore not subject to regulatory scrutiny by the ICAEW, IPA etc.
The exclusion covers you when you are genuinely and reasonably, contemplating an insolvency appointment. So, if someone approaches you for an IVA, you can give them the full range of options as required by SIP 3.1 and help them make a decision to go for IVA without having to worry about needing a licence. However, if in the course of your initial advice it becomes clear that the debtor is not suitable for an IVA, then you cannot continue to tell them what to do without having a licence. You can refer them to someone who has a licence and that person can direct them to a particular solution. I see it like someone who is referred to a heart surgeon, only to find out that the problem is actually cancer. The heart surgeon looks at his bit, says that it is outside his specialism and passes the patient on to an oncologist. They are in the same general line of work but have different specialisms and while a heart surgeon may also train as an oncologist and there could be overlaps, in general each stays within his own area of specialism.
We have recently heard from a client who decided that he would obtain a licence to cover other advisory work and debt repayment negotiation that he does when recovering debts for secured lenders and advising insolvent traders about asset disposals and organising their affairs in the run up to an anticipated bankruptcy. Similarly, we are aware that some volume IVA providers have split their structures so that the IVA side is a distinct entity that does not require a licence and their debt management and other divisions that require a licence are separate business units. This has advantages because the licence fee is turnover-related.
The feedback from those clients that have decided to obtain a licence is that the FCA staff are helpful and approachable. We have been told that they are receptive to reasonable arguments about how much of a firm’s turnover relates to consumer credit work and therefore requires a licence, so that the licence fee is adjusted to fit the amount of consumer credit work that you intend to do. Another significant point is that the application form, while complicated, is manageable (especially to IPs who are used to legal forms) and the FCA staff provide valuable, detailed feedback if it has not been completed correctly, allowing you to resubmit it correctly completed with minimal delay.
In conclusion, you will have to decide whether you need a licence to cover your firm. If you restrict yourself to insolvency work you should not need it, as long as you refer on anyone who is not suitable for an insolvency solution. That referral needs suitable disclaimers and careful wording. It needs to explain that an insolvency appointment is no longer likely to be appropriate so you cannot give further advice. The debtor should approach someone who has a licence and is authorised to give that advice. The firm you are sending them to may be one such firm, but others exist and they should check with the FCA for other regulated advisors. Disclose any fee agreement with the person that you are referring them to, so that you are totally transparent. When setting up the agreement with the person you refer them to, you should make it clear that you can only refer the debtor to them as an option. Let them know that you cannot require the debtor to use them and you have to let the debtor know that they can go elsewhere. If you want to be able to offer other solutions, then that is what the FCA regime is for and you should seek an appropriate licence.
