Guidance on validation orders– consumer credit

This form is for firms wishing to validate certain agreements that were entered into with consumers and are unenforceable against the debtor. Additionally, for agreements made on or after 1 April 2014 the relevant firm can also apply for money paid or property transferred under the agreement to be retained.

Background

Before 1 April 2014, the Consumer Credit Act 1974 (CCA) enabled firms to apply to the Office of Fair Trading (OFT) for an order to validate consumer credit or hire agreements that were entered into by an unlicensed creditor or as a result of an introduction by an unlicensed credit-broker. These orders were known as ‘validation orders’. In the absence of a validation order, such agreements were unenforceable against the debtor. The CCA also enabled firms to apply to validate ancillary credit agreements that were entered into by an unlicensed trader.On 1 April 2014 the OFT was abolished and we (the FCA) took over the regulation of consumer credit.

Agreements entered into on or after 1 April 2014

For agreements entered into on or after 1 April 2014 a new regime will apply for the purposes of ‘validating’ agreements.

The new regime is set out in Part II of the Financial Services and Markets Act 2000 (FSMA) and specific provisions relating to credit-related agreements have been made.

The FSMA regime differs from the CCA regime in several respects.

In summary, agreements entered into by a firm will be unenforceable against the other party (for these purposes, the ‘consumer’) if the agreement:

-is made by a person while carrying out a regulated activity without authorisation[1](Section 26 FSMA);

-is made by an authorised person without the appropriate permission while carrying out a credit-related regulated activity[2]that involved entering into a credit agreement(Section 26A FSMA);or

-is made by an authorised person with the appropriate permission, but as a consequence of something said or done by a third party (e.g. a credit-broker) while carrying out a regulated activity without authorisation or the appropriate permission to perform thecredit-related regulated activity (Section 27 FSMA).

In addition to agreements being unenforceable, the consumer is entitled to recover:

- any money or other property paid or transferred by him under the agreementand

- compensation for any loss sustained by him as a result of having parted with it

For agreements that are:

- entered into in the course of carrying on a credit-related regulated activity and

-are unenforceable because of Section 26, 26A or 27of FSMA

firms may apply to the FCA under Section 28A of FSMA to issue a written notice allowing:

-the agreement to be enforced or

-money paid or property transferred under the agreement to be retained.

Please note that the term ‘validation order’ is not used in FSMA but, because industry is familiar with this term, we have decided to use the term to refer to a notice allowing an agreement to be enforced or a notice allowing money paid or property transferred to be retained.

Agreements entered into before 1 April 2014

For agreements entered into before 1 April 2014, a modified form of the CCA regime will apply. Firms may apply to the FCA for a validation order in respect of the same type of agreements covered by the CCA regime. In determining whether to grant the order, the FSMA test will apply and we may only grant an order if we considerit would be just and equitable to do so.

In addition,a consumer has no right to recover monies paid or property transferred under the agreement or compensation for any loss sustained by him as a result of having parted with it under Sections 26, 26A or 27 of FSMA.

Determination of applications

We will grant a validation order only if we consider it just and equitable to do so.

For agreements entered into on or after 1 April 2014, in deciding whether it is just and equitable, under Section 28A of FSMAwe must have regard to certain issues. In summary, these relate to whether:

-the relevant firm reasonably believed that in making the agreement it was not contravening the requirement to be authorised or have the appropriate permission, or

-the provider knew that the third party was (in carrying on the credit-related regulated activity) contravening the requirement to be authorised or have the appropriate permission.

For agreements entered into before 1 April 2014, in deciding whether to grant the order we must consider whether the firm reasonably believed that a CCA licencewas not required, either by it, the credit-broker or the trader concerned (as the case may be).

In either case, this means that a firm must have a genuine reason to consider that it meets the relevant criteria.We are unlikely to grant a validation order solely because a firm has missed the deadline to registerfor interim permission or a firm with interim permission has not applied for authorisation within its allocated application period.

Compensation

If applicable, we will also specify in writing the amount of compensation recoverable if either of the relevant parties apply. However, we believe it unlikely that the right to compensation will apply in most cases and it is possible that we could specify a zero compensation amount.

To apply for compensation the party should write to us at the address below with details of the request. These should provide the full background to the request including the basis on which compensation is being sought. You will need to include the firm name and reference number or interim permission reference number (if known)and you should also include a copy of the relevant agreement. We may need to request further information from the firm or the consumer before we can specify an amount of compensation.

Once we have reached a decision on the amount of compensation we will confirm our determination by written notice to the applicant. We will also give a copy of the notice to the firm (if it is not the applicant) and, so far as it is reasonably practical to do so, we will give a copy to any other person who appears to us to be affected by the determination. The notice will give our reasons for the determination. It will also include an indication of the right to have the matter referred to the Tribunal and the procedure for such a reference. A person who is aggrieved by the determination may refer the matter to the Tribunal

Court procedure

For agreements that are not entered into in the course of carrying on a credit-related regulated activity and are unenforceable because of Section 26 or 27 of FSMA, the court procedure will apply. In these cases, only a court is able to allow an agreement to be enforced, allow property or money transferred under it to be retained or determine compensation when the firm and consumer do not agree on an amount. We will not consider applications for validation orders in respect of these agreements.

Qualifying criteria

Firms can only apply to validate one or more agreementsif it isa ‘relevant firm’. For agreements entered into on or after 1 April 2014, this will include a person that has not entered into the agreements but has the right to exercise rights under the agreement and, disregarding the effect of Sections 26(1), 26A(1) and 27(IA) of FSMA, would be entitled to enforce the agreement. This would include a person to whom the lender’s rights have been assigned. For agreements entered into before 1 April 2014, this means the person who, disregarding the effect of section 40(1A), section 148(1) or section 149(1) of the CCA (as the case may be), would be entitled to enforce the agreement.

We will only grantvalidation ordersif we are satisfied that it is just and equitableto do so. Firms are reminded that conducting consumer credit business without being authorised or holding an interim permissioncould amount to a criminal offence.

Fees

The fees charged for a validation order application will be based on the number of different types of credit agreements thata firm requests to be validated.The charge per type of credit agreement submitted for validation will be £3500. We will keep the level of the fee under review and may consult further on this in due course.

Form submission

Firmscan apply for a validation order by filling in the validation order form

on our website and posting it, and any supporting material, to:

Credit Authorisations

The Financial Conduct Authority

25 the North Colonnade

Canary Wharf

London

E14 5HS

Payment of the fee can be made by cheque, banker's draft or postal order and made out to The Financial Conduct Authority.

Supporting evidence

If you submit an application you must obtain a legal opinion considering whether and how far the agreements which are the subject of the application and the supporting sales process(es)complied with applicable consumer protection legislation. Depending on when the agreements were made, this will include compliance with the Consumer Credit (Disclosure) Regulations 2010, the Consumer Credit (Agreements) Regulations 2010, the Unfair Terms in Consumer Contracts Regulations 1999 and the Consumer Protection from Unfair Trading Regulations 2008. You may also provide reasons to justify why in any instance compliance was not achieved. You must submit your legal opinion in writing with your application.

Outcome of application

A validation order makes the relevant agreement potentially enforceable against the consumer.

Once we have assessed the application we will communicate our initial views to the applicant firm. The firm will then have the opportunity to provide written representations to us before we determine the application and issue our written notice.

Once we have determined an application we will, by written notice to the applicant firm, grant or refuse to grant a validation order. We will also, so far as it is reasonably practical to do so, give a copy of the notice to any other person who appears to us to be affected by the determination. The notice will give our reasons for the determination. It will also include an indication of the right to have the matter referred to the Tribunal and the procedure for such a reference. A person who is aggrieved by determination may refer the matter to the Tribunal.

Note that if we grant a validation order we may limit it to specified agreements, or agreements of a specified description or made at a specified time. The validation order could also be made conditional on the doing of specified acts by the applicant.

What happens next…?

Once you submit the application form and pay the fee, wewill:

  • acknowledge that we have received the application
  • if accompanied by an application for authorisation or a variation of permission, process the applicationfor a validation order at the same time
  • review the firm’s application and make an initial assessment of whether it is ‘just and equitable’ in the circumstances to grant a validation order, requesting any further information and / or clarification fromyou if needed
  • communicate our initial views to you – you will then have the opportunity to provide written representations before we determine the application and issue our written notice.
  • issue our written notice granting or refusingto grant the validation order and consider whether any action will need to be taken against you for conducting unauthorised business
  • as far as it is reasonably practicable to do so, provide a copy of the notice to any other person who appears to be affected by our determination.

[1]A reference above to firms being authorised, also covers firms with interim permission.

[2] In this context‘credit-related regulated activity’ means a regulated activity of a kind designated by the Treasury by order. The Treasury has designated these regulated activities by making the Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014 and they consist of:

-an activity of the kind specified by article 39F(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001(the ‘Regulated Activities Order’), which is the taking of steps to procure the payment of a debt due under a credit agreement or a relevant article 36H agreementand

-an activity of the kind specified by article 60B of the Regulated Activities Order, which consists of entering into a regulated credit agreement as lender and exercising, or having the right to exercise, the lender's rights and duties under a regulated credit agreement,

except in so far as the activity relates to an agreement under which the obligation of the borrower is secured on land.

The definition of ‘article 36H agreement’ is set out in article 36H(4) of the Regulated Activities Order.