The Woolard Review: Extending and improving consumer credit regulation

In September 2020, the FCA's Board commissioned a review of the unsecured credit market. The report was to concentrate on change and innovation in this market and to consider the effects of the Covid pandemic on it.
 

What is the Woolard Review?

The Woolard Review was set up not only to look at the unsecured credit market but also the effect of changes in regulation and the extent to which there may be a need for further regulation. In particular in relation to emerging business models that were currently outside the scope of consumer credit regulation.

Earlier this month, the Woolard Review was published and has been welcomed by both the FCA's Board and by HM Treasury. It may be assumed that many of its recommendations will be pursued and may result in a change to the law.

The report repays study by anybody involved in this industry for its thoughtful analysis of the current state of the market and of the effects that Covid is having on it. These include reducing the supply and demand for credit across most products, but leaving some consumers vulnerable when the Covid support mechanisms come to be withdrawn.
 

Who led the review?

The FCA's former interim CEO, Chris Woolard led the review, supported by an advisory panel representing broad selection of consumer representative organisations and established consumer credit industry players. The advisory panel did not include any representation from proponents of the emerging "buy now pay later" and salary-advance business models under consideration.
 

What are the recommendations? 

The review's report has garnered much comment, principally for its recommendation to bring some of the currently unregulated "buy now pay later" business models into the scope of consumer credit regulation, but in fact the report goes much wider than this. 

The report made some 26 separate recommendations. Between them, the recommendations envisage a large-scale programme to reform the way the consumer credit is regulated with a view to improving outcomes for consumers. This is likely to include a greater emphasis on "outcomes-focused" regulation and a more prescriptive approach to some areas, such as affordability assessment and forbearance, as well as a levelling of the treatment between different types of financial products.

The recommendations may be summarised as follows:

Recommendations 1 to 6:  The Response to Covid.

In the early part of the Covid crisis, the Government and the FCA encouraqed people who needed short-term support to take it including by allowing requests for forbearance (such as a repayment holiday) not to be noted on credit records. Whilst there is no criticism of the FCA's response to this sudden emergency, a number of recommendations are made with a view to taking a longer term and more considered approach to the problems created by an event like the pandemic. It is recommended that the FCA should:
 

• conduct a review of how this forbearance is reflected in the credit information that is maintained by the credit reference agencies, with a view to developing a treatment that can better reflect individual customer circumstances
• 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
• take a more prescriptive and consistent approach to forbearance, so that consumers in financial difficulties can benefit from this as quickly as possible
• 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
• co-operate with other agencies to ensure that there is a long-term, multi-year strategy in place to secure more adequate access to debt advice
• coordinate with the Government and insolvency regulators to ensure that suitable debt solutions are available to best serve people in financial difficulties, including by identifying quick actions to remove or reduce barriers to access suitable solutions (including fees) and steps to reduce consumers being driven towards unsuitable solutions (including as a result of marketing)
• co-operate with the Insolvency Service and Accountant in Bankruptcy (Scotland), to remedy the inconsistencies in the application of insolvency processes because there are multiple regulators covering different aspects of debt advice and debt solutions leading to divergent outcomes for consumers who are in financial difficulties. This should include attention to problems created by the fee structure of Individual Voluntary Arrangement (IVA) and Protected Trust Deed (PTD) products on debt advice and lead generators
• Discuss with Government possible arrangements to prevent the £90 fee for a Debt Relief Order (DRO) application preventing those who cannot afford to pay this for access to this debt solution
   

Recommendations 7 to 13:  Providing Access to Credit

Noting an estimate that there are 11 million people in the UK who need support in accessing cheaper or more sustainable forms credit, the report considers ways of improving access for those most in need of credit. This has led to recommendations for the FCA to:
 

• use the Regulatory Sandbox to accelerate the growth of products which support consumers to transition from high to low-cost credit and increase their financial resilience; but conversely
• 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, and if not, to take steps to limit use of terms like ‘credit building’
• encourage credit unions (seen as offering an important alternative to high-cost credit and a force for financial inclusion) by working with the Bank of England, Treasury and Northern Irish government to update legislation to allow credit unions to expand their product offering
• to encourage, community lenders (another valuable alternative to high-cost credit) to grow and to combine with credit unions and to consider how the lending capacity of Community Development Finance Institutions, for example, could be increased through subsidies or the development of investment incentives
• to discuss ways to overcome the reluctance of mainstream lenders to operate in non-prime credit markets to offer or fund alternatives to high-cost credit with a view to finding ways to overcome the barriers (e.g. regulatory and reputational risks) to entering this market
• to identify and address barriers preventing consumers having a better awareness of alternative credit products that may be available to consumers, including removing regulatory barriers to promotion where appropriate
• work with other bodies to increase consumer awareness of the risks of engaging with illegal money lenders and should explore removal of illegal online lenders from search results
• provide Government with evidence and analysis on the impacts of different social policies, including Universal Credit, that may drive the demand for high-cost credit so that Government can identify ways to reduce consumer harm in this area
   

Recommendations 14 to 15:  Credit information and open banking

Noting that credit information plays an essential role in supporting good outcomes in lending markets, but that the way the credit information market has operated has been led more by the wishes of lenders than the needs of borrowers, the review recommends that the FCA should:
 

• make clear the outcomes that the market needs to achieve for consumers and lenders, and how these will support a healthy credit market
• work with other stakeholders to review and if needed, change the current governance arrangements for sharing credit reference information and to identify any areas where legacy infrastructure is creating barriers to change and to set out a timeline for improving or updating systems. This might involve a mandatory reporting requirement; rules to require creditors to report when a County Court Judgement has been satisfied and addressing barriers to widespread use of open banking data, particularly for alternative credit providers
   

Recommendations 16 and 17:  Use of Digital Technology

Noting the growth of digital technology to support lending, and the uneven ability of different categories of consumer to make use of such technology, the report recommends that the FCA should:
 

• ensure it has in place guidance for digital design in the consumer credit sector that focuses on good consumer outcomes, ensuring consumers are informed and remain in control of their decision-making. The FCA should consider updating its disclosure requirements to make them more suitable to a digital age
• 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 unduly excluded from accessing credit
   

Recommendations 18 and 19:  Innovations in the unsecured credit market

The report notes the widespread emergence of unregulated Buy Now Pay Later (BNPL) schemes and Employer Salary Advance Schemes (ESAS).

While acknowledging the attractiveness of these arrangements to particular consumers, the report has identified a number of ways in which these innovations may contribute to poor consumer outcomes. BNPL schemes are seen as particularly likely to give rise to a number of risks. As a result the report recommends that, as a matter of urgency, the FCA should work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation and should in particular develop a proportionate regulatory framework including addressing how credit information should work within this market.

The report is less concerned in relation to ESAS and in this case considers that wider regulation may not be immediately necessary. However, it recommends that the FCA should take a proportionate approach and continue to closely monitor market developments.  Meanwhile, the FCA should encourage ESAS providers and major employers to draw up a code of best practice and should encourage employers to contract only with ESAS providers adhering to this code.
 

Recommendations 20 and 21:  The role of regulation

Noting that regulation has a vital role to play in preventing consumer harm and in maximising the benefits of the market to consumers and firms, the review goes on to consider generally the current regulatory approach. It acknowledges why the FCA has taken a product-focused approach, but suggests that this should be undertaken in a consistent way that does not lead to different outcomes for consumers of different products. 

This has led to a recommendation that the FCA should take an outcome-based approach to regulating the credit market. It recommends that the FCA set out clearly what the market should be achieving at each stage of the consumer journey and lifecycle of a product, and the support that regulation can offer. Regulatory initiatives should be identified and evaluated with reference to these outcomes.

There is a nuanced discussion to the approach the regulator should take in relation to requiring firms to assess affordability. In particular, on the importance that the FCA's emphasis on affordability checks has had on improving customer outcomes and the disincentive that being 'called out' on affordability plays in encouraging lenders to serve the non-prime market.

This is particularly the case if affordability requirements are to be outcomes-based rather than the result of following prescriptive rules, so that it is more difficult for firms to judge whether they have been compliant.

Even so, the report concludes that greater prescription would not drive better outcomes and that firms should be able to operate under an outcomes-based framework for these assessments. 

Acknowledging that firms may be put off entering the market out of fear of future action by the Financial Ombudsman Service (FOS), the report recommended that the FCA and the FOS should take forward a coordinated campaign of external activity to reduce perceptions of regulatory uncertainty in the credit market, particularly for affordability.

An example of the difficulties of product-based regulation is in relation to the approach to the issue of repeat or persistent use of credit, which the report notes that the FCA has already intervened in and in relation to high-cost credit. A continuing tendency for repeat use of fixed-term loans and ‘low and grow’ business models has led to loans being used in a similar way to revolving credit and with similar risks, requiring a similar level of protection (as for revolving credit).  

Accordingly, the review recommends the FCA to conduct an analysis 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 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 review also makes recommendations to the FCA to reform its rules so as to better serve customer interests.  This includes recommendations:
 

• 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, based on a more structured and prescriptive approach. This is likely to benefit both consumers and firms
• to make changes (in cooperation with HM Treasury) to both the CCA and the FCA Handbook to achieve a more outcomes-focused approach across the whole consumer journey
• to make use of the additional flexibility in credit regulation arising from Brexit to reform the CCA. This includes greater flexibility on information disclosures such as Annual Percentage Rate (APR) and the inclusion examples of cost of credit in pounds and pence so as to deliver regulatory outcomes in the unsecured credit market, including around information disclosures in simple terms
• To undertake its regulatory reform according to a clear, public timetable for change, putting forward an accountable executive to carry forward the recommendations accepted by the Board
   

What is the impact of the report?

This report will be taken seriously and it may be expected that many of its recommendations will be taken forward. Firms involved in regulated consumer credit, can expect that there will be necessary changes that will affect many aspects of their lending practices, processes and systems.

The emphasis on introducing "outcomes-based" approaches may prove a difficult one for firms to cope with, particularly when lending smaller amounts as it may be difficult to implement processes that have the required degree of sophistication.

Similarly, the extension of the scope of requirements to assess affordability and in relation to exercising forbearance may also prove unattractive to firms. There is a danger, then, that rather than extending access to credit, some of the reforms, if badly thought through, could reduce the provision of credit to those who most find it difficult to access. However, these risks are ones that the report's author certainly understands and it expected that the FCA will find a way of introducing reforms that produce the customer outcomes they are looking for, without having this effect.

In relation to BNPL businesses, it now seems inevitable that these will face some degree of regulation, although it will be interesting to see whether this would require them to be treated as other consumer credit lenders. If this does happen, there may also be an impact for retailers that team up with the firms providing this sort of solution if it brings them into the category of credit brokers.

In the world of regulation, change is something that is always with us, but following the Woolard Review it looks like regulatory change in relation to consumer credit is set to accelerate over the coming months and years.