Invoice Finance and the Consumer Credit Act
There remains a degree of confusion as to the extent to which invoice financiers are affected by the provisions of the Consumer Credit Act 1974 as now amended by the Financial Services and Markets Act 2000. This is not helped by the fact that some of the statutory provisions are amongst the most opaque anywhere on the statute book, which is largely as a result of the piecemeal way in which the various European directives have been incorporated into UK law over the last 30 years.
There are basically two important issues which arise when considering the impact of the Consumer Credit regime on invoice finance.
1) Regulation of invoice finance agreement
It is generally accepted that there is no question of a properly drafted invoice finance agreement being regulated by the CCA, because there simply is no element of credit to be provided by the funder.
Even a full recourse agreement in which the funder has the right to be reimbursed in relation to any debts which are not paid will not involve the provision of credit by the funder to the client, provided that the finance charges are drafted as discount rather than interest, and that the recourse provisions are properly drafted.
This point is occasionally raised by insolvency practitioners and others but it is authoritatively dealt with for example in Salinger, the Law and practice of invoice finance at para 10–49.
2) FCA authorisation of invoice financiers
Prior to April 2014 entities running a consumer credit business or a consumer hire business, or carrying out various related activities, required a consumer credit licence issued by the Office of Fair Trading. Since April 2014 the licensing system has been replaced by a requirement for those carrying out such activities to be authorised by the Financial Conduct Authority under the Financial Services and Markets Act 2000.
So in theory invoice financiers may require to be authorised if their clients are generating debts which are themselves regulated by the CCA.
In practice it is quite rare for invoice financiers to deal with such debts, because for example:
(1) debts with debtors who are companies or partnerships of four or more persons are never regulated, and
(2)even where the debtor is a sole trader or a partnership of two or three individuals, the vast majority of ordinary trade debts with such entities fall within an exemption for debts payable without interest or other charges and by 12 or less repayments within a period of 12 months: see article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
However, there are instances where invoice financiers take assignments of debts which are regulated by the CCA, for example where a portfolio of regulated consumer hire debts is acquired, and for this reason many invoice financiers have obtained the necessary FCA authorisation to enter into regulated consumer credit and consumer hire agreements, which also covers operating as assignee.
Separate categories of authorisation exist in relation to the activities of debt collection and debt administration, and carrying out these activities in relation to consumer credit and consumer hire agreements with sole traders/individuals or partnerships of two or three persons still requires FCA authorisation even when such agreements are exempt from regulation, for example under the business use criteria for credit in excess of £25,000.
However, this does not affect invoice financiers because there is a separate exemption from authorisation in relation to these activities for creditors and owners (including assignees) under article 39H(1)(a) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.