What is Mind and Management?
The FCA use the term ‘mind and management’ to describe the method of regulation they intend to bring to UK consumer credit. The premise is, that if you are operating in the UK the basics of your business must also be based. In the Guide to Consumer Credit, the FCA state under location of offices that: ‘If the firm is a body corporate constituted under UK law, the firm’s ‘mind and management’, e.g. directors, compliance function, audit function, should be in the UK’ (P13 table – Consumer Credit Being Regulated Guide).
‘Mind and management’ also applies to lead providers that are fully based overseas, and this simple statement could be a problem for several consumer credit businesses. For some larger Payday Lenders, owned by listed US companies, with a management base outside the UK, the problem is immediate, and re-organisation will be required. A recent ‘This Is Money’ website article noted that: “Cash America President and Chief Executive Daniel Feehan has told investors: “It’s clear that the FCA would prefer us to have an office in the UK and someone there locally that they could correspond with directly. An office would provide a base for ‘key people’ whose principal task would be to engage in what have become daily discussions with the FCA.”
The issue can be more complicated as the FCA have discussed the possibility of reviewing the board minutes of lenders to ensure that where any decisions are being taken, it is the UK based management that are driving them. This does seem strange as there has been no mention to date of the issue of ‘ownership’ being a problem in the FCA guides.
It would seem that ownership alone should not affect ‘mind and management’. Many businesses i.e. banks insurance companies, currently regulated by FSA/FCA have been owned outside the UK, yet they do not appear to fall foul of this ruling. The FCA want UK consumer credit businesses to have management and control here, the issue is how do you prove your decision taking is UK based?
The existence of smaller lenders based in EU countries seems at odds with the fact that in 2011 we implemented the EU Consumer Credit directive in the UK, which brought in ‘maximum harmonisation’ across consumer credit. This allowed businesses based in an EU country to operate anywhere else within the EU. This may appear to be ‘law’, but the FCA have indicated that it is not acceptable to them. It is perfectly possible for a company to argue that an office based for example in Estonia or Malta is acceptable, but do not be surprised if the FCA deny those businesses a licence to trade while they try and get a court ruling in favour of the EU directive. How many businesses could afford to wait while a court decides?
The issue of ‘mind and management’ could present different problems for other businesses who are not direct lenders. Online lead generators that have grown up in the last 6 or 7 years, are in the main based outside of the UK, as are many of their affiliates. Up to now this has been a perfectly acceptable way to utilise low business running costs. These lead generators have no actual contact with consumers, and are predominantly web sites hosted on computers anywhere in the world. Their business is automated and they pass details of people looking to borrow to lenders, hence it follows they can be based universally.
Again many of these are US owned and have no need to place anyone in the UK. In these cases will the FCA maintain companies must have a UK base? The answer is probably yes.
In the opinion of Nick Ross, an ex FSA supervisor now working with Huntswood PLC, the FCA will apply a level of judgement and a common sense approach to the issue. He suggests:
• businesses should be prepared to show the FCA how they will have a regular business presence in the UK, certainly regarding directors, compliance and audit
• a proportionate approach to senior management presence would be acceptable, the FCA will not expect all senior management to be based in the UK all of the time, consider the structure of your board and go from there
• those ‘based’ in the UK should have appropriate autonomy and influence – the FCA will test this
• Compliance and audit functions in the UK should be supported by responsible and accountable senior management.
The bottom line is that the seemingly innocuous wording of ‘mind and management’ leaves many businesses with a consumer credit licence struggling to know whether they are in a position to obtain full authorisation to trade early next year.