Regulating for better outcomes - next steps in consumer credit

Speaker: Nisha Arora, Director of Consumer and Retail Policy
Event: Westminster Business Forum 
Delivered: 8 October 2021
Note: This is a drafted speech and may differ from the delivered version

Highlights

• Consumer credit remains a key priority for the FCA as the consequences of the pandemic for consumers continue to unfold
• We are increasing our focus on consumer outcomes and needs, particularly for those in vulnerable circumstances; and bringing to bear the FCA’s new, more innovative, more assertive and more adaptive approach
• We are consulting on a new Consumer Duty and working on new regulation for buy-now-pay-later products; we’re also focusing on support for borrowers in financial difficulty and people who use high-cost credit products
• Credit is a huge and rapidly changing market - firms, consumer and debt advice organisations, government and the FCA need to continue to work together so that it delivers the right outcomes for consumers.

It’s never been more important that the consumer credit market works well for consumers, firms and the economy. The consequences of coronavirus (Covid-19) are still unfolding, and we are yet to see what the “new normal” looks like. Those consequences have been more severe for those in difficult financial circumstances, and millions more people now find themselves in that situation. Between February and October last year, 20 million adults in the UK saw their financial situation worsen, and nearly 10 million saw their unsecured debts increase. Citizens Advice Bureaux in England and Wales took nearly 40% more calls about debt in August 2021[2] than they did in August 2020. 

Delivering better outcomes in consumer credit

Credit and debt affect the daily lives of tens of millions of people. That’s why, as it has been since the FCA was formed, consumer credit remains one of our key priorities. Since the start of our regulation of credit markets, we have significantly improved outcomes for consumers using credit. Our credit card remedies[3] will save consumers up to £13 billion by 2030. We’ve better protected people in vulnerable circumstances, and we’ve secured more than £900 million in redress for those who have been poorly treated by credit firms.  And the response to the pandemic showed the FCA, the industry, and debt advice bodies at their best, working together to give consumers security and protection in the face of sudden instability and uncertainty.

But there is much more to do. And in a world where credit markets are changing rapidly, where we see innovative products and increasing digitalisation, and where consumer needs and demands are changing, the FCA needs to respond as a forward-looking and proactive regulator. 

Our Chief Executive Nikhil Rathi has set out[4] what this means in practice, and the three key shifts in the FCA’s approach to regulation. We are becoming more innovative, using data and technology so that we can act more quickly and decisively. We are becoming more assertive - making full use of our powers, helping others to use theirs, and playing our part in tackling issues that don’t sit neatly within our regulatory perimeter. And we are becoming more adaptive, changing our approach more quickly as the world changes around us. 

These shifts are essential to how we regulate credit markets and deliver the outcomes we want to see. We want borrowers to have access to affordable products that meet their needs and don’t lead them to become over-indebted; we want to see people being able to make informed decisions, and firms treating borrowers fairly – especially when they fall into difficulty. And we want to see firms competing vigorously and innovating to serve their customers better. 

I’ll talk now about our work to deliver these outcomes; much of which has been informed by the Woolard Review. 

Underlying our approach to consumer protection and competition, across all retail markets, is an increased focus on consumer outcomes and needs, particularly for those in vulnerable circumstances. 

When the pandemic began, we saw credit firms quickly and effectively adapting their processes and communications to deliver good outcomes for their customers. We want that to remain a focus for firms in credit and other markets, putting consumers at the heart of what they do. 

And we want firms to take particular care with customers in vulnerable circumstances and at greater risk of harm, who may need more help to make decisions, or may be more susceptible to behavioural biases, or less able to manage debts. 

Making firms focus on outcomes - a new Consumer Duty 

Our focus on better consumer outcomes, particularly for the most vulnerable, runs through our vulnerability guidance[5] and our proposals[6] for a new Consumer Duty. 

We see many good practices from credit firms, but we also see poor practices that hamper good decision-making, or that exploit behavioural biases and vulnerabilities. That leads to products that are poor value or not fit for purpose, unacceptable customer service, and information that misleads consumers or fails to help them understand what they’re signing up to. As market offerings become more complex and digitalisation increases the speed of transactions, consumer decision-making becomes even harder. 

We need to ensure our regulation adapts to the changing market environment. When we think back to how different consumer credit was five or ten years ago, it underlines the importance of adaptive regulation that can respond and develop as the market does. The proposed Consumer Duty will set the standards for firms in all retail markets including consumer credit. Firms will have to have a greater focus on consumer outcomes and act to enable these. They will need to test what happens when consumers use their products and services – if credit products are causing financial harm or aren’t delivering the right outcomes, firms will need to fix this.

Later this year, following our recent consultation, we plan to consult on proposed rules and set out our approach to supervision and enforcement under the new Duty. That approach will be informed by our emphasis on being more innovative, adaptive and assertive – using data to allow us to intervene early as harm emerges, building flexibility into our approach so that we can address market changes, and acting quickly to improve and tackle poor practices before they become entrenched. 

Regulation for unregulated buy-now-pay-later products

That emphasis will also inform our approach to buy-now-pay-later products that we don’t currently regulate. We need to revisit the boundaries of what is and isn’t regulated credit as new products develop and consumers’ use of them changes. As both the Woolard review and Nikhil have said, we need to take a holistic view of markets, acting assertively on harm around the edges of our regulatory perimeter, regulating according to what consumers need and use in the real world. 

We agree with Chris Woolard that buy-now-pay-later is a product that can have important benefits for consumers as it develops and becomes more widespread, but it also carries risks and the potential for harm. We expect the Government to consult on a proposed regulatory framework in the next few weeks. 

After that, we will follow with our own consultation on the relevant FCA rules, to set clear standards for firms. But we’re certainly not sitting back and waiting. We are using existing powers to protect buy-now-pay-later users – for example, scrutinising marketing materials and the way these products are promoted. We have consumer protection powers outside of the Financial Services and Markets Act regime which we can apply to unauthorised firms where we see poor practice.

Supporting borrowers in financial difficulty

Another key area of work will be a continued focus on outcomes for credit borrowers in financial difficulty. We expect to see many people remaining in or falling into financial difficulty over the coming months, and feeling the impact of price rises and the ending of temporary support measures such as furlough and the Universal Credit uplift. 

We are making sure that lenders provide borrowers with the support they need when they get into difficulty. That means early engagement between consumers and firms when problems arise; appropriate help for consumers that meets complex needs and takes account of vulnerable circumstances; consistent and appropriate reporting to credit reference agencies; and good quality debt advice and debt solutions where borrowers need them. 

The tailored support guidance[7] for firms that we issued early in the pandemic remains in place, helping firms to give customers support tailored to their needs. Our review in March found that firms have progressed well in implementing the guidance and acted quickly to build capacity to support consumers. Some have accelerated plans to automate aspects of the customer forbearance journey. The use of automated and digital approaches can be helpful to customers although further enhancements would be beneficial, for example clear signposting of non-digital support or the recording of new vulnerabilities.

Firms continue to engage with us constructively, and we’ll also be talking to consumers and other stakeholders about their experiences. Our surveys and findings over the next few months will inform our next steps.

In the meantime, we’re acting to protect consumers and monitoring for emerging harm, taking supervisory action, carrying out outcomes testing and analysis of credit reference agency data. In July, following a multi-firm review, five debt packager firms[8] stopped providing regulated debt advice, and we used formal powers to stop another firm providing regulated advice. We are concerned about the potential for harm where debt packager firms may be biased towards recommending costly debt solutions without regard to the customers’ best interests and are considering policy changes to address this risk. The Woolard review rightly identified wider issues in the debt advice market that largely sit outside our perimeter – but in line with our more assertive approach to perimeter issues, we’re working with the Insolvency Service and others to help address these. 

We’ve restarted our Credit Information Market Study[9], as recommended by the Woolard Review, with our interim report coming early next year. Credit information plays a key role in determining consumers’ access to credit, and consumers are often concerned about the impact on their credit file of any support provided to them by lenders when they are experiencing financial difficulty. The market study will take account of market and regulatory developments over the last 18 months as well as our work to help borrowers in financial difficulty. 

Protecting people who use high-cost credit

We’re also looking closely at outcomes for consumers who use products like high-cost short-term credit, home collected credit and guarantor lending, following recent developments in those markets. I’ll use high-cost credit as a short-hand term but there is a lot of variation between these markets, from product features to the demographics of the people they’re used by. Complaints to the Financial Ombudsman Service about unaffordable high-cost loans have grown markedly in recent years and are being upheld at a rate above 60%. That indicates that firms have been giving expensive loans to people that they shouldn’t have on a significant scale, with potential for real harm. Some high-profile firms offering high-cost products have left the market or got into difficulty, in large part because they have built up significant liabilities for redress to consumers. 

This may mean reduced levels of lending to some consumers, because a fair, responsible and sustainable market shouldn’t see credit being offered to people who can’t afford to repay it.

To achieve the right outcomes in this market, we need to balance consumers’ need for access to credit, with the need to make sure it is affordable and sustainable for them. We need to understand borrowers’ needs, what products they use and the alternatives, and the impact that borrowing has on them over time. We also need to understand how regulation affects firms in those markets and the supply of credit to customers. However, we make no apology for setting and maintaining high standards of lending and conduct to protect consumers, especially where those consumers are at considerable risk of harm. And we need to ensure the conditions are right for firms to innovate and compete to serve these consumers – and consider what may be standing in the way of firms lending or entering the market. 

Some solutions for customers without access to credit may not be in our gift. But, taking our assertive approach to regulation, we need to look beyond our perimeter and work with others to help find and support those solutions. That could include alternative provision by the commercial sector, and policy initiatives such as the Government-backed pilot programme for no-interest loan schemes. 

A credit market that delivers for consumers

Consumer credit is a huge and diverse market, populated by firms of all sizes, that’s changing rapidly through innovation, technology and evolving consumer needs. All of us - firms, consumer and debt advice organisations, government and the FCA - need to continue to respond quickly and work together to make sure it works well for consumers as they continue to face economic uncertainty and financial pressures.

We will regulate to encourage innovation, competition and high standards of conduct and consumer protection, especially for those most at risk. We will maintain our close focus on consumer outcomes and bring to bear our more innovative, more assertive and more adaptive approach. And we will continue to prioritise our credit work, to help build a responsible, sustainable market that delivers the best possible outcomes for the millions of borrowers who use it every day.