The Woolard Review: regulatory expansion potential overhaul 

The FCA published a report on change and innovation in the unsecured consumer credit market following a review by its former Interim Chief Executive, Christopher Woolard CBE. Unsecured credit refers to a range of products such as credit cards and store cards, overdrafts, personal loans, high-cost-short-term credit, buy now pay later ("BNPL") and home collected credit.

Among its (fairly extensive) list of recommendations, the report concludes that BNPL products should urgently be brought fully into scope of consumer credit regulation. The report also makes a number of suggestions to increase or reform consumer credit regulation, ranging from financial promotions and ease of customers' user experience, through to relending and a reform of credit union regulation.

The current position of the unsecured consumer credit market

The report highlighted that the market has seen a boom in credit card borrowing in the last 25 years, albeit with a contraction in 2020 as a result of the COVID-19 pandemic. The majority of UK adults use some form of regulated consumer credit, with 81% having used it within the prior 12 months.

However, younger people seem to be moving away from products such as credit cards and towards new offerings, including unregulated BNPL products.

The report also pointed out that access to consumer credit may be limited for those who find it hard to evidence their creditworthiness (such as those with poor credit histories who may have been in financial difficulty or those with thin or no credit files). Other limitations include a lack of access to technology and lack of awareness of options available.

The report also found that the unsecured credit market is highly dynamic, with COVID-19 accelerating the trend towards tech-enabled consumer credit products, which brings benefits to consumers but also increases the risk in relation to some mental health conditions where impulse control is a problem. However, the report also found that a lack of access to technology will lead to the exclusion of vulnerable customers from useful products and credit providers.

Report Recommendations

The report made a total of 26 recommendations, we have summarised the key takeaways thematically below:

1. BNPL schemes and Employer salary advance schemes ("ESAS")
   
   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. 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.
   
   The report does not recommend that ESAS be regulated but did recommend that the FCA should look to formally recognise a code of best practice to prevent consumer detriment from practices such as "locking in" employers or cross-selling in appropriate products to employees.
2. Regulatory reform
   
   To achieve a regulatory system which is more outcomes focused across the whole consumer journey, changes will be needed to both the Consumer Credit Act ("CCA") and the FCA Handbook. Much of the groundwork for CCA reform has already been laid by the FCA’s 2019 report. The FCA must engage with the Treasury to prioritise the work on CCA reform.
   
   The report also recommends that the FCA use its Business Plan Priority to undertake an outcome based approach to regulating the consumer credit market and set out clearly what should be achieved at each stage of the customer journey and lifecycle of a product, and how regulation can support that. This should 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. Regulatory initiatives should be identified and evaluated with reference to these outcomes.
   
   The FCA should 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 costs, as opposed to the current system of using APR.
3. Online lending and UX
   
   The report highlighted that many of the features of online lending which consumers find attractive (e.g. smoother customer journey, 24/7 access and automation) can present problems, particularly for vulnerable customers. The report recommends that the FCA introduce new guidance to focus on good consumer outcomes and ensuring that consumers remain in control of decision making. The FCA should also consider updating its disclosure requirements to make them more suitable to a digital age.
   
   The report also recommends that the FCA continue to monitor digital innovations in the consumer credit market to ensure that consumers who do not access digital platforms are not unduly excluded from accessing credit.
4. Credit information:
   
   The FCA should consider reforms in relation to credit information, including whether a mandatory reporting requirement would drive better consumer outcomes. The report also recommends that an assessment of the credit information market and whether the way it operates enables consumers to build their credit file responsibly. The FCA should consider whether credit information infrastructure is creating a barrier to change and set out a timeline for improving or updating systems.
   
   The report also found that the FCA should conduct a review of how forbearance is reflected in credit information. As part of this, the FCA should 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.
5. COVID-19 and forbearance:
   
   The FCA should also continue the decisive, fast-track action it has taken in response to COVID-19 to create a more prescriptive and consistent approach to forbearance, so that consumers in financial difficulties can benefit from this as quickly as possible. The FCA should also 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.
   
   The report identified that many measures introduced by government are only temporary, but have provided essential support to people affected by the pandemic. However, the report concluded that the economic impact of the pandemic will be more permanent and that there will be an increased need and demand for debt solutions. It states that the FCA should coordinate with other government and regulatory bodies to ensure suitable debt solutions are available to those who need them.
6. Review of relending
   
   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. The report concludes that there is a place for such lending in the market, but consumers need the same level of protection as for revolving credit. The FCA should conduct a review of relending, which 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.
7. "Credit builder" products:
   
   The FCA should 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 use of terms like "credit building".
8. Regulatory cooperation:
   
   Across the UK there are multiple regulators covering different aspects of debt advice and debt solutions and it is essential that this does not lead to divergent outcomes for consumers who are in financial difficulties. The FCA, Insolvency Service and Accountant in Bankruptcy (Scotland), with support from government, must cooperate to swiftly remedy the issues that can be observed in the Individual Voluntary Arrangement (IVA) and Protected Trust Deed (PTD) market.
   
   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.
9. Alternatives to high-cost credit (credit unions and community lenders):
   
   The report concludes that there is a case for removing some of the current restrictions on the activities of credit unions and that the FCA and government should work together to allow credit unions to expand their product offering. Similarly, community lenders should be encouraged to grow or, subject to regulatory reform, be combined with credit unions. The FCA, Treasury and Responsible Finance should report on way to increase the lending capacity of community lenders through subsidies or investment incentives.

To date, mainstream lenders have been reluctant to offer or fund alternatives to high-cost credit. The report recommends that greater involvement of these lenders in non-prime credit markets is essential to drive competition and innovation. It recommends that the FCA, the Treasury and Fair 4 All Finance should convene discussions with mainstream lenders to overcome regulatory and reputational barriers to entering the non-prime market.

The FCA should seek to remove regulatory barriers which serve to prevent firms from making consumers aware of alternatives to high-cost lending.

Co-Author: Henry Glasford, Associate