The Financial Conduct Authority (FCA) have published a report on change and innovation in the un-secured consumer credit market.
A review by Christopher Woolard CBE, the former Interim Chief Executive, looks at out how regulation will support a healthy market in changing business models and new developments in unregulated buy-now-pay-later (BNPL) unsecured lending, considering the coronavirus pandemic impact.
Woolard said “It is vital that consumers have a fair market that works for all, as most of us will use credit at some point in our lives”.
“BNPL unsecured lending needs to be brought into regulation to protect consumers and make sure there is a secure provision of debt advice for those who need it and maintain a regulatory response to the coronavirus pandemic”.
Nearly £250 billion of outstanding consumer credit debt is amongst UK householders, more than 42.5 million used consumer credit in 2019.
The review sets out 26 recommendations to the FCA some working with the Government and other parties to build a better future for the unsecured market and include:
Debt Advice - The provision of debt advice will be critical to a sustainable market in the long term, especially through the recovery from coronavirus. Free debt advice services need secure, long-term funding as demand increases to as many as 1.5 million additional cases, following the pandemic. Funding needs to be in place to help the poorest pay fees when applying for debt relief orders.
The regulation of unregulated buy-now pay-later - BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the coronavirus pandemic. The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm. For example, more than one in ten customers of a major bank using BNPL were already in arrears. Regulation would protect people who use BNPL products and make the market sustainable.
Forbearance - The FCA responded quickly and effectively in the emergency phase of the pandemic – it needs to sustain this response through the recovery, for example by looking at whether it should revise its rules and guidance to drive greater consistency in the type of support firms offer consumers struggling to pay.
Alternatives to high-cost credit - A sustainable credit market needs more alternatives to high-cost credit. The FCA should work with the Government and Bank of England to reform the regulation of credit unions and Community Development Finance Institutions. More should be done to encourage mainstream lenders into this space.
Outcomes focused - Regulation should be driven by the outcome being sought and how consumers use products in the real world. Regulation should deliver similar protections where consumers face similar harms. In addition to making sure products are affordable, there should be an increased focus on lenders meeting consumers needs’ for as long as they hold the product. The FCA should review repeat lending.
Woolard’s review report has been supported by the FCA and they agree buy-now pay-later business needs to be brought into regulation.
This review is long overdue as more people will be tempted in difficult times, as we are now, to buy on the 'never, never' and then get into difficulty.