The Woolard Review: change on the horizon for regulated and unregulated consumer credit providers

Readers will recall that in 2014 the FCA took over the regulation of consumer credit and since that time it has, through regulation and direct action against firms, sought to bring the sector to heel.  The FCA's focus is now on adopting a cohesive approach to the regulation of consumer credit.   As part of this, in September 2020, the board of the FCA asked Chris Woolard (the former interim Chief Executive) to conduct a review of the regulation of the unsecured credit market.  The results of the Woolard review were published in February 2021.

Underpinning the Woolard Review is a concern on the part of the FCA that unsecured credit (in both regulated and unregulated forms) poses significant risks for consumers and as such the Review chimes very much with the FCA's wider focus on vulnerability, covered in detail here.  In this piece, we focus only on those aspects of the Woolard Review that suggest potential areas of future regulation and FCA Enforcement and Supervisory activity.

1. As readers will be aware, in response to the pandemic and associated economic impact on consumers, the FCA put in place temporary guidance in respect of debt forbearance by credit providers. Woolard recommends that the FCA now turn to consider the more long-term impact of the pandemic and adopt a more prescriptive and long-term approach to forbearance coupled with swift action against firms where necessary.  This should include consideration of an approach to forbearance that kicks in before default takes place.
2. Woolard queries whether products in the market designed to improve consumer's credit rating (so called "low and grow" products) really do allow sub-prime borrowers to move into the mainstream. He recommends that the FCA look at this and take action to prevent potentially misleading descriptions of products as "credit building" if they are not.
3. Woolard recommends that certain new credit products, particularly favoured by those with poor credit records or financial vulnerability, are brought more within the scope of  the FCA's remit:
   1. Buy Now Pay Later (BNPL) products offered by suppliers such as PayPal and Klarna.  These allow consumers to delay and/or spread the cost of a purchase.  The BNPL provider is usually paid a portion of the purchase price by the retailer. Whilst interest is not payable, there are late payment fees and a consumer's credit rating can be impacted.  The FCA estimate that the BNPL market was only around 1 % of the UK credit market in 2020 – but that equates to some £2.7bn.  BNPL seems to be particularly favoured by the younger end of the market who enjoy trying products before money is debited.  Woolard recommends that BNPL be brought within the regulatory perimeter as "a matter of urgency".  One consequence of this is that retailers partnering with the BNPL provider will need themselves to be authorised for credit broking – as Woolard notes, some may not want the additional burden and drop out of the market at this stage.  The board of the FCA has already noted its endorsement of this proposal.
   2. Employer Salary Advance Schemes (ESAS), which allow consumers access to a portion of their wages before their due date.  Woolard notes that ESAS are comparatively rare still and usually found in the retail, hospitality and healthcare sectors.  ESAS providers usually charge a fee to the consumer.   Woolard does not call for ESAS to be brought within the regulatory perimeter but does suggest that the FCA encourage providers to draw up a code of best practice.
4. Woolard cautions that the use of technology (whilst beneficial) can make obtaining credit more frictionless and too easy, which may be problematic for vulnerable consumers.  He recommends therefore that the FCA introduces guidance in respect of digital design to ensure that protections are built into the "consumer journey". 
5. Whilst noting that since it took on the regulation of consumer credit, the FCA has focussed on protecting consumers by requiring affordability checks before credit is extended to consumers, Woolard recommends that the FCA broaden focus to the entire "customer journey", from product design to vulnerability eventuating after credit is advanced.  This gels very much with the FCA's new guidance on its Principles for Businesses, relating to vulnerability.  Woolard notes that such an outcomes based approach to consumer credit regulation may require a change in primary legislation.

It is clear that for those firms in the consumer credit space, regulatory pressure is set to increase even further. New entrants, particularly those offering BNPL (and those retailers partnering with such providers), will need to accept that it is likely that they too will fall under the FCA's scrutiny.  With the FCA's focus on vulnerability feeling very timely during the no doubt long running economic impact of COVID and the FCA's desire to walk and talk tough, firms in this sector need to look carefully both at what the FCA expects.