It doesn’t always pay to be flexible – the risks of inadvertently straying into regulated credit agreements with parents

18th April 2024

Image of school students around a table

Academies and maintained schools are able to charge for certain services and goods, including optional extras that are offered to its pupils. Such optional extras include education that is provided which is not part of the national curriculum and extended day services, for example breakfast club and after-school clubs. Charges may also be made for vocal or instrumental tuition made available to pupils.

To afford pupils the opportunity to take part in these extra-curricular activities, schools may offer payment plans to parents and carers to ease the financial burden of such payments upfront.

However, schools may not be aware that if parents and carers are offered the right to pay for extra-curricular activities in instalments, such agreements can fall within the Financial Services and Markets Act (regulated Activities Order) 2001 (the “Act”) and all of the legal and practical requirements associated with it.

What does the Act mean?

If the Act applies, an agreement will be a regulated credit agreement (“RCA”), which requires a lender to be authorised by the Financial Conduct Authority (“FCA”). Entering into an RCA without the appropriate authorisation is a criminal offence and such agreements will be unenforceable against parents unless a court order is obtained.

What is an RCA?

An agreement that is entered into after 1 April 2014 will be an RCA if it meets all of the following elements:

  1. Be a credit agreement between an individual or relevant recipient of credit, say the parent, and any other person, the school
  2. The agreement means the school provides the parent with credit of any amount
  3. It is not an exempt agreement.

What is credit?

The provision of credit includes a cash loan and any other form of financial accommodation which involves a borrower – i.e., parents – undertaking an obligation to repay it.

Generally, the test for identifying credit is where a debt is deferred and credit is extended, whenever the agreement provides for the borrower to pay, or gives the option to pay, later than the time at which payment would otherwise fall due under an agreement.

Therefore, a school is likely to be providing credit to parents whereby there is a contractual right to defer payment of a debt or sum of money that is otherwise due immediately. For example, if parents are offered a payment plan for an extra-curricular trip that allows a greater time for payment, this will stray into providing credit and may constitute an RCA.

Do the regulations apply?

Crucially, an RCA will only be caught by the Act if the agreement is being carried on by way of business. The test for whether this applies is where the purpose of the lending activity is to return a financial reward or have a significant impact on the school’s wider commercial activities.

To avoid the process of obtaining FCA authorisation, an alternative is to agree repayments and conditions in such a way that they all fall within exemptions to the Act.

Practical steps

Given the severity of entering into an RCA without the appropriate authorisation, schools should tread carefully before agreeing payment plans with parents.

Before offering such agreements to parents, we recommend the circumstances of the proposed agreement be reviewed to confirm whether the relevant exemptions can be applied. The good news is that more often than not, there is an appropriate exemption available as long as you adhere to that exemption.

A deferred payment agreement can work for both parties, allowing parents to involve their children in important extra-curricular activities whilst easing financial burdens and giving the school certainty without fear of getting into difficulty with complex legislation.

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