Blog

What is happening?

The FCA published, in February 2021, a report on change and innovation in the unsecured consumer credit market following a review by its former interim Chief Executive, Christopher Woolard. The Woolard Review, which is available to view here, sets out how regulation can better support a healthy market for unsecured lending.

In this review, we summarise how the Woolard Review ties in with other recent developments in the consumer credit space and what the implications may be for regulated firms.

What has happened?

The Woolard Review

This report was commissioned by the FCA Board with the aim of concentrating on innovations in the unsecured credit market and asking whether more needed to be done to ensure a healthy and sustainable market. The Board has considered and accepted the recommendations of the Review directed to the FCA and it will build the Review’s recommendations into its business planning.

The following recommendations made in the main body of the report are organised here by topic.

Buy Now Pay Later (BNPL)

The unregulated Buy Now Pay Later (BNPL) market more than trebled in size in 2020, poses potential harms to consumers and needs to be brought within regulation to both protect consumers and ensure it is sustainable.

Many consumers do not view interest-free BNPL as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer. Although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers – and the Review finds it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see. With several BNPL providers planning to expand to higher-value retailers, or offer their products in-store, the risk that consumers could take on unaffordable levels of debt is increasing.

The Government’s decision to bring BNPL into regulation will mitigate these risks by giving the Financial Conduct Authority oversight of BNPL providers and allowing consumers to escalate their complaint to the Financial Ombudsman Service if things go wrong.

Under these plans, providers will be subject to FCA rules so will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.

As a matter of urgency, the FCA is being requested to work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation. Once the necessary powers are obtained the FCA will need to develop a proportionate regulatory framework including addressing how credit information should work within this market.

Find out more about our Credit Lending and Buy-Now-Pay-Later regulation services.

Digital lending

The FCA is being requested to ensure it has in place guidance for digital design in the consumer credit sector that focuses on good consumer outcomes and ensuring consumers are informed and remain in control of their decision making. The FCA is also being requested to consider updating its disclosure requirements to make them more suitable to the digital age. The FCA should continue to monitor digital innovations in the consumer credit market and ensure consumers who don’t want to, or are unable to access digital platforms, aren’t excluded from accessing credit.

Debt advice

To ensure that the imminent demand for debt solutions as a result of the pandemic is met, the FCA is being requested to coordinate with the UK Government, devolved administrations and insolvency regulators to ensure that suitable debt solutions are available to best serve people in financial difficulties. This should include identifying quick actions to remove or reduce barriers to accessing suitable solutions (including fees) and steps to reduce consumers being driven towards unsuitable solutions (including the role that marketing plays in this).

Lender forbearance and high-cost credit

The FCA is being requested to conduct a review of how forbearance is reflected in credit information and how this affects decisions made by lenders and consumers. This should:

• Assess the potential impact of the approach taken to the ‘masking’ of credit files,
• Look at the current arrangements for reporting forbearance to CRAs and whether these are consistent and adequate, and
• Identify any areas where credit information could better reflect individual consumer circumstances and respond in a more nuanced way to changes in those circumstances.

As part of this, the FCA is being requested to work with industry and consumer groups to set out clear outcomes for what reporting of arrears, default and forbearance should achieve for lenders and consumers in both the short-term and longer-term.

The FCA is also being requested to consider whether action may be needed to deal with emerging harm related to access to credit, treatment of existing consumers and increased levels of vulnerability of borrowers as a result of the pandemic.

A sustainable market needs more alternatives to high-cost credit. Despite positive efforts to encourage more alternatives, the market has not delivered at scale, and further reform is needed. This includes liberalisation of the approach taken to regulating credit unions and to encourage more mainstream lenders to participate at lower costs in this part of the market. Credit unions offer an important alternative to high-cost credit and enable wider financial inclusion. To fully realise their potential, there is a case for removing some of the current restrictions on their activities. The FCA is being requested to work with the Bank of England, the Treasury and the Northern Irish government to set the timetable on updating the Credit Unions Act 1979 and Credit Unions (Northern Ireland) Order 1985 to allow credit unions to expand their product offering.

The FCA, in collaboration with the Treasury, Fair 4 All Finance and leaders from the industry, is being requested to convene discussions with mainstream lenders on their participation in providing alternatives to high-cost credit.

Credit information

Through the Credit Information Market Study or as part of a wider strategy, the FCA is being requested to:

• make clear the outcomes which the market needs to achieve for consumers and lenders, and how these will support a healthy credit market, including where consumers interact directly with CRAs and Credit Information Services.
• assess whether the credit information market is operating in a way that enables consumers who use credit responsibly to build their credit file and access more credit options,
• consider whether a mandatory reporting requirement would drive better outcomes for consumers,
• consider the case for introducing rules to require creditors to report to courts when a County Court Judgement has been satisfied or partially satisfied, to drive up the quality of existing credit information, and
• identify and address barriers to widespread use of Open Banking data, with particular attention to alternative credit providers.

In addition, consumers who have experienced financial difficulties and have poor credit files struggle to access a wide range of credit options. These consumers need products that not only offer a suitable and sustainable source of credit but are designed to help them to improve their credit files and build financial resilience.

The FCA is being requested to:

• Conduct work to identify whether ‘credit builder’ products currently in the market are effective in supporting consumers to access a wider and cheaper range of credit products. If these products are not found to be effective, the FCA should take steps to limit the use of terms like ‘credit building’.
• Include a theme on a future cycle of the Regulatory Sandbox to accelerate the growth of products that support consumers to transition from high to low-cost credit and increase their financial resilience.

Regulation

A review of change and innovation in the unsecured credit market is an opportunity for the regulator to set out clear outcomes which a healthy credit market should be achieving across all products and sectors. The FCA is being requested to take an outcome-based approach to regulating the credit market and set out clearly what the market should be achieving at each stage of the consumer journey and lifecycle of a product and how regulation can support that. This would include outcomes regarding financial promotions, information disclosures, affordability assessments, persistent debt/repeat lending, forbearance, debt advice and solutions and debt collection.

Outcomes should also be developed around the recovery of consumers who have had financial difficulties and their ability to access credit over time. The FCA is being requested to make these outcomes public to ensure firms have clarity around the direction of future regulatory initiatives.

The FCA is being requested to also ensure as much emphasis is placed on conduct during the lifetime of a loan as at the point of initial affordability assessment.

The FCA is being requested to conduct a review of relending. This should set out clear outcomes covering repeat lending and persistent debt across all products. It should look at whether additional protections or guidance are needed around the relending of fixed-term loans to achieve these outcomes in light of the findings of the FCA’s recent work on relending in high-cost credit.

The FCA is being requested to conduct policy work to review its overall approach to forbearance. This should look to set out clear outcomes for the forbearance process and firms’ responsibilities in achieving these. The FCA is also being requested to consider a more structured and prescriptive approach to achieve a level of consistency between firms’ approaches to forbearance.

To achieve a regulatory system that is more outcomes-focused across the whole consumer journey, changes will be needed to both the Consumer Credit Act 1974 (CCA) and the FCA Handbook. Much of the groundwork for CCA reform has already been laid by the FCA’s 2019 report. The FCA is being requested to engage with the Treasury to prioritise the work on CCA reform.

The UK’s exit from the European Union also creates additional flexibility in credit regulation which needs to be considered as part of the CCA reform work. This includes greater flexibility on information disclosures such as Annual Percentage Rate (APR) and the inclusion of examples of the cost of credit in pounds and pence. The FCA is being requested to conduct a review to identify what additional flexibility will be available to the FCA and the Treasury following the UK’s exit from the European Union and how this can deliver regulatory outcomes in the unsecured credit market, including around information disclosures in simple terms like pounds and pence cost.

Find out more about our consumer credit regulation services.

Peer to peer lending

In its Policy Statement PS19-14, the FCA introduced a package of rules and guidance to improve standards in the sector, with the result that it;

• Introduced more explicit requirements to clarify what governance arrangements, systems and controls P2P platforms need to have in place to support the outcomes they advertise,
• Strengthened rules on plans for the wind-down of P2P platforms,
• Applied marketing restrictions to P2P platforms, designed to protect new or less-experienced investors,
• Introduced a requirement that an appropriateness assessment (to assess an investor’s knowledge and experience of P2P investments) be undertaken, where no advice has been given to the investor, and
• Set out the minimum information that P2P platforms need to provide to investors.

The rules and related guidance came into force on 9 December 2019.

Find out more about our peer-to-peer lending regulation services.

Credit brokers – motor finance

Credit brokers, including car retailers and motor finance brokers, should be aware that the FCA ban on discretionary commission models for motor finance came into effect on 28 January 2021. This ban restricts arrangements where a commission, fee or other financial consideration is payable directly or indirectly by a lender to a broker in connection with a regulated credit agreement, and where this is wholly or partly affected by the interest rate (or other items within the total charge for credit) set or negotiated by the broker.

Insight from the team

“With an array of economic challenges faced over much of the past year, consumers are now seeking financial support through a number of different mediums, not least from those firms who are, in some capacity, providing credit to support in these challenging times. Whilst these firms continue to provide essential funding for those who need it, it is also essential that these firms are properly assessing and considering vulnerabilities that may have materialised and, indeed, may materialise over the coming months. This is a real focal point for the regulator and one which we have continued to drive with the firms we work with.”

Matthew Williamson – Head of Fintech

How can we help you?

If you’d like to know more about how we can help you with planning for future regulatory changes or for your consumer credit, motor finance and peer-to-peer lending or related operations, or any other aspect of FCA compliance, our expert team is here to help.

Contact us today on 0207 436 0630 or email info@thistleinitiatives.co.uk.