This briefing is the second in a series of briefings by Walkers on the Lending, Credit and Finance (Bailiwick of Guernsey) Law, 2022 (the "LCFL"), and provides an overview of the licensing regime applicable to consumer lending businesses under Part II of the LCFL (a "Part II Licence") and the key aspects of the Lending, Credit and Finance Rules and Guidance, 2023 (the "Rules"), issued by the Guernsey Financial Services Commission (the "GFSC") applicable to the holder of a Part II Licence (a "Licensee").

Related briefings on the LCFL licensing regimes in Guernsey are available here:

  • Overview
  • Financial Firm Business
  • Virtual Asset Service Providers
  • Financial Platforms and Crowdfunding

Who needs a Part II Licence?

All businesses that provide or offer consumer credit, or services ancillary to the provision of consumer credit, in or from within the Bailiwick of Guernsey ("Guernsey") will need a Part II Licence unless an exemption applies. Further, all Guernsey businesses that provide or offer consumer credit, or services ancillary to the provision of consumer credit, anywhere in the world will need a Part II Licence unless an exemption applies.

Carrying out any of these activities without a Part II Licence or an applicable exemption is a criminal offence.

The GFSC have published a Notice with respect to the Disapplication of the Requirement to hold a Licence under section 40 of the LCFL (the "Class Exemptions Notice") which sets out certain blanket exemptions. We summarise this further below.

Consumer credit" includes various loans and other forms of credit provided to individual non-business persons, including personal loans, mortgages, credit cards, and goods and services purchased on credit, hire purchase or with instalment payments.

"Services ancillary to the provision of consumer credit" includes assisting a person in taking out credit, introduction services, and credit brokerage. It also includes debt administration to the extent that it may affect the terms or conditions of the provision of credit, e.g. where it leads to a refinancing or restructuring of credit. This briefing focuses on consumer credit.

In all cases, the person obtaining the credit must be an individual acting other than for purposes of their trade, business or profession.

Specific activities requiring a Part II Licence under the LCFL include:

  • personal loans, whether secured or unsecured;
  • mortgages secured against residential real property, provided that the property is owned by the individual borrowing;
  • providing credit cards to individuals in their personal (but not business) capacity; and
  • providing any hire purchase financing or leasing activities to an individual (where goods are hired or leased for over 3 months).

What if the business is already regulated?

The Rules clarify that holders of any other licence under other regulatory laws in Guernsey must also hold a Part II Licence in order to undertake activities regulated under Part II of the LCFL. Therefore a bank, for instance, which provides personal loans, mortgages and/or credit cards, will need a Part II Licence in addition to its banking licence.

Are there any exemptions?

The Class Exemptions Notice provides for the following to be exempt from the licensing requirement under part II of the LCFL:

  • loans or credit where the lender does not charge any interest and fees (i.e. there is no interest or fee for the instalment payments), including where a retailer sells goods to a customer who pays by instalments, but charges no uplift on the price;
  • loans or credit to businesses (including individuals when for their business);
  • late payment interest;
  • non-hire purchase hiring or leasing;
  • a mortgage secured against real property located in or outside Guernsey and is not the borrower's residence, including:
    • commercial property in Guernsey;
    • residential property in Guernsey where the property is owned by a trust or company which is also the borrower; and/or
    • a mortgage secured on residential property for the purpose of buy-to-let, development or bridging finance – unless the mortgage is also secured against the borrower's family home;
  • Lombard lending to high net worth individuals secured against marketable securities;
  • lending to beneficiaries (by a trustee), family members (including by entity owned by family), employees, directors, partners, bona fide shareholders and ultimate beneficial owners;
  • insurance intermediaries (licensed under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002) offering insurance payable in instalments where the credit is provided by insurance provider;
  • retailers providing credit through a single licensed credit provider in respect of the retailer's goods and services; and
  • a motor trader providing credit through a single licensed credit provider for goods and services sold by the motor trader (the credit must be a simple repayment loan and the total value of credit sales through that motor trader must be less than £250,000 per year).

Those qualifying for an exemption under the Class Exemptions Notice are not required to undertake any further action or make any notifications or applications to the GFSC.

The GFSC also have the power to grant a discretionary exemption where a lender is not within the Class Exemptions Notice, but on the facts it is not appropriate for them to be licensed.

There is an equivalence-based exemption in respect of businesses regulated in jurisdictions considered to offer appropriate or equivalent protections as those provided under the LCFL regime ("designated jurisdictions"). Such businesses must notify the GFSC in writing and certain conditions apply, including that they must:

  • be registered, constituted, incorporated or resident in (as applicable) in that designated jurisdiction;
  • must have principal place of business in that designated jurisdiction and not have permanent place of business in Guernsey; and
  • carry on activities in or from within Guernsey in a manner that it is permitted in the relevant designated jurisdiction.

However, businesses seeking to utilise the equivalence-based exemption are required to comply with Part II licence application requirements in regards to information and documentation required to be submitted in order to obtain the exemption. This effectively means that whilst an entity may obtain the benefit of an exemption, it is required to meet the same application requirements as it would need to in order to apply for a full licence.

What requirements apply to a Licensee?

Cooling-off period (excluding mortgages)

A Licensee must provide non-mortgage customers with a cooling-off period of at least two weeks during which customers may cancel the credit agreement, subject to the return of any credit, goods, or services provided. Licensees must not charge any fees for cancellation prior to a loan being drawn down or goods or services being provided and in any event any fees charged during the cooling-off period are restricted to the costs of the Licensee and must not be based on a percentage of the value of credit.

Period of reflection (mortgages)

A Licensee must provide mortgage customers with a period of reflection of at least seven days from the date that a final and unconditional offer of a loan is made by the Licensee. During that period a Licensee must not actively pursue, pressure or contact the customer or withdraw or amend the offer. If the property transaction to which a mortgage agreement relates does not proceed, a customer may return any drawn down funds and cancel the agreement and Licensees must not charge additional fees in such cases.

Early repayment

The Rules impose limitations in relation to early repayment charges. Customers must be allowed to make full early repayment of the principal of the credit provided, and the Rules provide for a maximum early repayment fee, which depends on the type and term of the loan.

Annual percentage rate ("APR") and total charge for credit

A Licensee must calculate APR using one of the formulae set out in the Rules. The total cost of credit for non-mortgage products is capped at 100% of the principal amount of the credit. Specific methods of

calculating the total charge for credit are also prescribed under the Rules. The total charge/total cost of credit must include certain fees and costs, such as intermediary (e.g. brokers and introducers) fees, account maintenance costs and payment-related costs.

Customer information

A Licensee must provide customers with the following information before they take out credit:

  • the existence and nature of any commission, fee or other payment paid to or received by them in the process of providing the credit - this requirement extends also to mortgage advisers and brokers, as well as ancillary service providers in relation to home finance arrangements;
  • interest payable, including the APR;
  • total cost of the credit;
  • a repayment schedule with the value and timing of repayments;
  • details of a cooling-off/reflection period; and
  • details of early repayment, including any early repayment fees and charges.

During the life of the credit agreement, a Licensee must (at least annually) provide customers with a report reflecting interest charged, payments made and outstanding principal loan remaining.

Once the credit is fully repaid, a Licensee must provide a closing statement.

Unfair contract terms

The Rules prohibit Licensees from including unfair terms in their consumer credit agreements and if such terms are included they will be unenforceable. In general, a term is unfair if, contrary to the requirements of good faith, it causes significant imbalance in the parties' rights and obligations, to the detriment of the borrower. The Rules list out a number of unfair terms (broadly based upon the UK's Consumer Rights Act 2015), but the list is not exhaustive. Examples of unfair terms include (without limitation) terms which:

  • exclude or restrict a Licensee's liability arising from a breach of customer rights provided by law;
  • relieve a Licensee from providing services with reasonable skill and care;
  • restrict customers from taking further loans with other credit providers; or
  • enable Licensees to alter the terms of the agreement unilaterally and without a valid reason which is specified in the agreement.

It should be noted that when deciding whether a term is unfair the GFSC will take all circumstances into account, and the Rules recognise that there are certain circumstances where a term, which would otherwise be considered unfair, would be permissible, such as an increase to the applicable interest rate to reflect an increase in the base rate, provided that the borrower is notified immediately.

Suitability: creditworthiness and vulnerability assessments

Licensees must consider the suitability of the credit to be provided to a customer's circumstances, requirements, needs and position. A Licensee recommending a product or arranging or effecting an agreement must consider certain factors, such as information received from the customer, their creditworthiness and whether they are vulnerable or elderly and the terms of the proposed agreement. Businesses must take a proportional approach to assessing the creditworthiness of a customer with regard to the value of the credit, nature of any security and the customer's circumstances.

Policies and procedures

Licensees must have certain written policies and procedures in place, e.g. a vulnerable customer policy, procedures for assessing affordability, creditworthiness and vulnerability, including factors that warrant increased scrutiny.

Businesses must also have policies and procedures in respect of customers experiencing repayment difficulties, including a forbearance policy.

High net worth individuals ("HNWIs")

Licensees can treat certain customers as HNWIs where the customers are within the criteria for a HNWI as stipulated in the Rules, provided that they have the written consent of the customer. Businesses can dis-apply to HWNIs the sections of the Rules relating to cooling-off period and period of reflection, customer suitability and customers experiencing payment difficulties.

Financial resources, capital adequacy, liquidity and insurance

The Rules apply financial resources requirements, however these do not apply to a holder of a licence under either the Banking Supervision (Bailiwick of Guernsey) Law, 2020 or the Insurance Business (Bailiwick of Guernsey) Law, 2002.

Licensees must ensure that they always hold sufficient liquid assets in reserve to allow for an orderly wind-down over a three-month period. Further, the level of these assets must be monitored and checked at least quarterly and the Licensee must immediately notify the GFSC where it is found that the assets are no longer sufficient (the notification must include the steps being taken to rectify the breach).

Mortgage lenders and brokers must maintain professional indemnity insurance and employee dishonesty or fraud insurance in line with the minimum requirements set out in the Rules

Licensee responsibilities

The Rules include certain corporate governance and management responsibilities, common to all persons licensed under the LCFL which mirror those required under other regulatory law licensed persons. These requirements relate to:

  • Minimum criteria for licensing - a Licensee must meet the minimum criteria for licensing set out in the LCFL (the requirements are similar to that in other regulatory laws in Guernsey). The GFSC also has the full range of supervisory, enforcement and rule-making powers under the LCFL that it has under those other regulatory laws;
  • Conduct of business principles – these ten principles relate to integrity, skill, care and diligence, conflicts of interest, information about customers, customer assets, market practice, financial resources, internal organisation, and relations with the GFSC;
  • MLRO and MLCO – Licensees must appoint a Guernsey resident Money Laundering Reporting Officer and a British Isles resident Money Laundering Compliance Officer;
  • Audited accounts – Licensees must have their accounts audited (except for the holder of a Part II Licence that is only providing services ancillary to credit);
  • Conflicts of interest policy – Licensees must have a policy on managing conflicts of interest appropriate to their business;
  • Outsourcing – Licensees remain responsible for outsourced functions, and must have appropriate systems in place to oversee, control and monitor outsourced functions. Before appointing an outsourced service-provider, a Licensee must carry out due diligence on the provider and conduct a risk assessment;
  • Complaints – including a requirement for a complaints procedure and a complaints log, together with an escalation process and GFSC notification;
  • Customer money – customer money is required to be held in a segregated customer money bank account with an approved bank;
  • Marketing – Licensees must ensure that promotions and advertising are fair, transparent, and honest and include sufficient information for customers to understand the cost of credit provided, particularly the likely total cost of credit. Other requirements apply to advertising and promotions;
  • Appointed Retailers and Appointed Motor Traders ("ARs") – an AR is a business that sells a Licensee's product. The Licensee remains responsible for the AR's conduct and must take measures to ensure the AR's compliance with the Rules, including, by ensuring awareness and relevant training is provided regarding the Rules to the AR and relevant employees. The terms of agreement between the Licensee and the AR will therefore be crucial;
  • Treatment of surplus following default - where a Licensee takes possession of assets provided as security following a default, any surplus realised from the sale of those assets must be returned to the borrower. Any assets sold by a Licensee under such circumstances must be sold on an arms-length basis and the Licensee must take reasonable steps to realise a market value for them.

Walkers' Comment

The Part II Licence regime and Rules introduce consumer protection for lending in Guernsey.

Businesses operating in a number of sectors which provide credit to customers in Guernsey, including informal or non-bank/private lenders, telecommunications and utility providers, credit card issuers, mortgage lenders, garages and retailers that provide credit or instalments payments, are likely to be caught within the scope of the Part II Licence regime. Affected businesses need to consider factors such as reviewing or preparing relevant business risk assessments, business plans, their terms and conditions of business, policies and procedures relating to fair treatment of and disclosure of certain information to customers etc. to ensure that they do not breach the LCFL.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.