How consumer credit regulation affects the sports industryCharles Maurice
Most lawyers (the author included) would generally consider the two topics of consumer credit and sport as perennially distinct and, whilst they often both fall under the remit of commercial lawyers generally, it seems difficult on the face of it to see how the two topics might overlap.
But, as with most activities, participation in sport for the average person (ranging from actually playing a sport to supporting a team) costs money. This personal monetary cost often leads to cash-flow management, and there are plenty of products in the market that are designed to do just this1 – spreading out the cost of participation in sport for the individual over a chosen period, in much the same way that one might take out a personal loan to pay for any other type of good or service.
Some are designed to turn a profit and some are not, but the fundamental purpose from the individual’s perspective is to enable a purchase to be made that an individual otherwise could not or would not fund in one lump sum payment. Thus, in the sporting context, a person might be able to stagger their gym membership over a period of time, or pay for their football season ticket incrementally in a similar way.
This article looks at how consumer credit is regulated in the UK, and how the regulation affects the sports industry.
Regulating Consumer Credit
As a response (amongst other things) to a perceived need for greater and more effective regulation, on 1 April 2014 the UK government transferred responsibility for regulating these types of arrangements from the Office of Fair Trading (“OFT”) to the Financial Conduct Authority (“FCA”).2 With it came a wholesale review of the consumer credit regime in the UK and the way that entities offering consumer loans are supervised in their activities. To date, this change manifests itself in the form of much stricter requirements for registering with the FCA to provide consumer credit-related activities,3 along with revised powers for the FCA to enforce mal-practice.
The consumer credit regime in the UK is, in effect, a consolidation of a number of pieces of primary and secondary legislation, supplemented by rules and guidance.4 A full explanation of this is beyond the scope of this article, however there are certainly a number of the components of the regime that are relevant to the daily life of most sports fans or amateur participants and it is these that I would like to focus on here.
How does consumer credit legislation apply to sport?
Why does this matter in the sporting context? Well, under the new regime, entities wishing to carry out consumer credit-related activities were given certain timeframes in which to convert their existing OFT permissions into full FCA permission for the activities carried out. At the time of writing, this process continues, but as it does so, more and more sports clubs will need to (if they have not done so already) analyse whether their activities in this arena continue to require full FCA permission or whether there is a handy exemption that they can take advantage of, which may operate to mean that the consumer credit regime can be avoided in full or in part (as to which, please see below).
‘Sports clubs’ is meant in the widest context. Compliance with the consumer credit regime is not a new concept for established professional sports outfits and the football industry is as good as any place to provide an example of this. One need only look at historic season ticket purchase packages to see that:
- the costs of tickets can be spread out over a period of time (e.g. six or twelve months); and
- the cost of a season ticket purchased in this way is generally more expensive than a ticket which is purchased in one lump sum payment.
This practice is consumer lending in its most obvious form as the club is financing the cost of the annual ticket at the outset (as well as supplying the ticket), with the ticket purchaser repaying this sum in instalments over time. The additional price of the ticket purchased over time will amount to the ‘cost’ of the loan to the purchaser of the ticket, and the percentage take up of these products suggests that this is a price worth paying for the ease of spreading the cost over a period of time.
But ‘sports clubs’ obviously also include the vast array of amateur sports clubs to which many of us belong in various different guises. These entities (be they gyms, golf clubs, rugby clubs) all generally charge subscription fees to members, and depending on the cost of membership and the various packages offered with respect to how those membership subscriptions are paid, these clubs may also find themselves within the scope of the consumer credit regime, either requiring appropriate FCA permission or suitable advice as to how to avoid the need for permission.
What is the cost v benefit of offering credit to consumers?
As with many financial offerings, there is a cost/benefit analysis that applies to consumer credit activity in a sporting context, with the cost of compliance with the consumer credit regime offset against the potential benefits of appealing to a wider financial audience.
For larger organisations, the answers to this question may be more obvious. Returning again to professional football, it is (for example) in a club’s interest to make its tickets available to as many sections of society as possible in order to fill seats that may otherwise remain unsold.5 Historically therefore, appropriate consumer credit authorisation from the OFT was a relatively standard path trodden by such clubs, which in turn enabled the clubs to offer a range of different ticket packages (e.g. a full season ticket, with the cost spread out over the length of a season, accompanied by an amount of interest and admin charges). Compliance with the regime more generally would then follow, but because the documentation involved was always similar (and therefore easily replicated) and regulation by the OFT relatively light touch, this was generally managed in the ordinary course of business by clubs with perhaps only minimal external advice.
When it came to buying or selling a club, diligence on consumer credit compliance under the OFT regime was largely a box-ticking exercise. Provided the club had the necessary permissions and a half-decent track-record in terms of lack of complaints, along with documentation that was fundamentally compliant with the law (perhaps through a review of a small sample), little further attention would be paid to this area, with more focus (perhaps understandably) placed on actual ticket revenues rather than the means by which that was achieved.
The change to the FCA regime has somewhat altered this approach, as some clubs6 have chosen to try and avoid falling within the scope of the consumer credit regime altogether, rather than apply for FCA permission and submit to the greater scrutiny of the new regime. This has resulted in a greater emphasis on how compliance is achieved, the effects of non-compliance and whether any exemptions relied upon have been properly applied, and diligence into a potential acquisition will focus on these matters. It also means that if a club is sold to a third party and that club has an FCA permission in place to carry out consumer credit activity, then (depending on the structure of the deal) the club will likely need to go through a change of control notification process with the FCA - a set of actions which may need to be factored into any deal timeline.
One also needs to consider the on-going compliance burden on clubs if they choose to take the regulated route. As offering consumer loans will inevitably be secondary to the core business of the club, a club will need to develop or purchase sufficient expertise to oversee its consumer credit activities and stay on the right side of the law. This will obviously have a cost (both time and money) and whilst it is easy to suggest that as this is likely to be a non-core area to a sports club, that a club should simply play it safe and not offer consumer-credit affected products, the reality of life is much less simple – the consumer credit regime now covers an array of activities that may not immediately appear to be within scope (e.g. the operation of an online ticket purchase portal may, depending on its structure and purpose, constitute credit-related regulated activity).7
Headline issues for sports clubs to consider
Whilst I have touched on some of the key themes of the revised consumer credit regime, it is wrong to suggest that the regime exists to make lending to consumers harder than before. Broadly, the change in regime is, as with other regulatory changes introduced in recent times, designed to better safeguard the rights of those who are deemed to have less bargaining power in a financial transaction. What that does not mean in the context of sport is that there is now no way to offer consumers the same sort of monetary flexibility that they previously had with products offered under the old OFT regime – clubs can, and do, structure their financial offerings to consumers in such a way as to fit with the new regime, and I would invite those that have shied away from this to reconsider their options (perhaps particularly amateur sports clubs).
So how might this be done and what do professional and amateur clubs need to consider? Well, each club will have its own set of circumstances, but very broadly there is one exemption to the consumer credit regime which a club might look to take advantage of, the successful application of which would mean that a club would not need FCA permission. This is where the club is offering credit to a consumer and at the same time supplying the goods or service that the consumer is paying for,8 such a club is likely to be able to fall outside of the scope of the consumer credit regime if:
- the amount of credit is a fixed sum;
- the consumer is required to repay the credit in 12 repayments or less within a period of 12 months or less; and
- the credit is provided without interest or other charges.9
The criteria for this exemption need to be complied with exactly in order for it to apply and it is worth noting that the 12 payment limit is a new concept10 – prior to 18 March 2015, this was restricted only to four payments (i.e. the credit had to be repaid in four payments or less, within a 12 month period), which meant that this exemption was not particularly attractive to consumers as the maximum payment spread that could be achieved was quarterly. This change is certainly useful as it now enables those sports clubs that do not offer these arrangements for a profit to offer their customers/members the opportunity to pay for the same ticket/membership (etc.) at the same price, simply spread out over a year, and in the process avoid the watchful eye of the FCA – the upsides of which hopefully balance out the lack of regulation (which is fine until a problem occurs with the credit process).
Benefits to amateur sports clubs
The exemption is therefore likely to be of real interest to amateur sports clubs who, prior to 18 March, would either have needed to have full FCA consumer credit permission to enable members to stagger their payments monthly over a year, or offer quarterly payments rather than monthly. The hope is that this would then lead to participation in sport becoming more affordable to more people. We can thank the insurance industry for this.11
What this exemption also requires is that the three components of borrowing (by the consumer), lending (by the club) and supplying (by the club – e.g. physical supply of a ticket) are all present in the same agreement. Turning again to the world of football, those clubs that have arrangements with third parties either:
- for the sale of tickets; or
- for the supply of finance to fans, will need to think carefully about the structure of their offerings to fans.
In short, the arrangements with fans will need to be tri-partite in nature (involving the third party) and at present how that would fit with any commission arrangements between club and third party is a bit of a grey area. We are currently structuring a number of such arrangements and the effect of these will make interesting future reading as they play out under the new regime.
Disadvantages to amateur sports clubs
The downside of using this exemption is the third element mentioned above – that the credit is provided without interest or other charges. Quite apart from denying some clubs and organisations an opportunity to make a further margin on a product,12 the greater the take up of these arrangements, the more likely it is that a club or organisation will need to shoulder an administrative burden in attending to the successful operation of these arrangements, even if they fall outside of the consumer credit regime – this in itself may bring more costs that simply cannot be reclaimed as part of the credit arrangement.
A recap of what sports clubs should consider
Finally, I have set out below what I consider to be the starting questions that any club in this situation must ask itself. These are non-exhaustive, and I recommend that any club that has not given these issues some previous thought considers speaking to an appropriate external advisor to guide them through the regime and future compliance: this is a specialised area requiring bespoke advice, and I would be very happy to discuss these issues further with any readers that are interested.
- Does the club offer credit to individuals?
- Do any of the club’s partners offer credit to individuals and, if so, is the club involved in this process?
- If the club does offer credit to individuals, does the club actually need to do this for: (a) the financial success of the club; or (b) the reputational success of the club?
- If the club does offer credit to individuals, does the club make a profit out of these arrangements, or can the club dispense with this profit and offer the credit in 12 monthly instalments for no additional cost?
- Has the club got sufficient administrative procedures in place to: (a) comply with the FCA consumer credit regime; or (b) shoulder the administrative burden that is likely to be placed on the club in attending to multiple credit arrangements.
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- Tags: Commercial Law | Corporate Law | Financial Conduct Authority | Football | Governance | Office of Fair Trading | Regulation | United Kingdom (UK)
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About the Author
Charlie is a senior associate at Stevens & Bolton LLP and specialises in the sports, media and entertainment sectors. Charlie advises on a wide range of sporting issues and has particular experience in the motor racing and football industries.