Review into change and innovation in the unsecured credit market (the Woolard Review)

11 November 2020 10:00-12:00

Discussion 1 – Drivers of credit

• Participants felt that the drivers of credit haven’t materially changed over-time; often it is event driven. Nonetheless, it was highlighted there is a section of society that uses credit because they can’t afford everyday essentials.
• It was noted that attitudes to credit have changed, there has been an increase in ‘shopping around’ which can bring greater price transparency to the market.
• There has been a shift towards greater digitalisation of the consumer journey, driven by consumer expectations. It was noted that coronavirus (Covid-19) and the lockdowns have driven consumers online, accelerating existing trends in the market. Nonetheless it was noted that many consumers still need ‘human contact’ and that certain forms of credit are already too automated. Lenders should be alert to groups of consumers who would benefit from greater human interaction.
• It was identified there has also been a shift by younger consumers away from traditional forms of credit, including credit cards and overdrafts.
• It was noted that during the financial crisis, there was a reduction in the supply of credit, with more lenders focusing on the prime market. Participants considered whether as a result of coronavirus gaps may again appear in the supply of credit. 
• It was highlighted that it’s important to consider how credit works and not just what it costs. For example, for vulnerable consumers, the features of a product may be more important than price. It was noted that anyone can become a vulnerable consumer, and so its important the market seeks to ensure good outcomes for everyone.

Discussion 2 – Digital

• It was highlighted that during 2020, eCommerce achieved 2025 projections. Coronavirus has accelerated the growth of trends that were already there.
• The growth in digital lending is happening due to changes in consumer behaviour. It was noted that millennials expect to interact via apps or online platforms. There are benefits to a seamless consumer experience but there must be adequate friction to ensure consumers understand the products they’re using.
• It was noted that although more data is good, the industry needs better quality data. There was a view that Big Data and Open Banking can support better decision-making and that it can be particularly beneficial for those with ‘thin’ credit files. Nonetheless it was noted that in some pilots, certain groups of consumers are cautious about consenting to the use of their data.
• It was highlighted that its important non-digital consumers aren’t left behind. It was also noted that vulnerable consumers often need choices and more detailed explanations. The reason people get into difficulty is because they don’t understand the consequences of what they’re taking on. 
• The interaction with the retail sector was considered and that there are risks, particularly for those who struggle with impulse control. Websites can already be designed to encourage people to spend more than they can afford. Participants considered the benefit of consumers being able to set limits in advance on how much they want to spend.

Discussion 3 – Are consumers needs being met?

• There was a view that one of the barriers to consumer needs being met, was the availability of data. It was noted there’s a lot of useful data out there (e.g. held by government) which could help to better inform lending decisions.
• It was noted certain groups of consumers struggle to access credit; younger consumers, those who are self-employed, those who have moved to the UK from abroad or those who have previously been in financial difficulty.
• Participants noted the poverty premium and that those who need access to credit the most can be excluded.
• There was a view that there is an opportunity for sub-prime lenders to help consumers repair their credit files and access mainstream credit. 
• As part of a reaction to coronavirus, some participants felt the existing credit market is obsessed with prime customers only, which can leave others with few options. It was thought this could be due to the availability of data. There was a view that mainstream lenders should have a greater appetite to lend to sub-prime borrowers.
• Some participants felt existing credit scoring doesn’t work well for consumers, that many consumers find it hard to understand what their score means. It was also noted that products which are designed to build credit scores often don’t work well for consumers, sometimes leaving them with more debt than they wanted. 
• It was noted that research on the illegal money lending market was last completed in 2010. As a result, there is little understanding of the scope of the market in the UK, particularly the potential growth of illegal money lending online.
• Consideration was given to what could be done to encourage better consumer decision-making and behaviour. It was noted that lenders could provide information and services to consumers to take better control of their borrowing.

Discussion 4 – Limits of the market

• Participants acknowledged that identifying the limits of the market will always be complex. 
• It was noted there will be consumers in the market, who probably shouldn’t be and equally there are consumers who are excluded form the market, who should be able to access credit. The latter, it was noted, could be as a result of greater use of automated decision-making.
• Those who are excluded include those with impaired credit records or thin files. The impact of being excluded can be both positive and negative; it can push people towards debt advice and support, but it can equally mean consumers borrow at high cost or illegally.
• It was highlighted that those excluded from the unsecured credit market, may be able to access alternative secured forms of credit, pawnbroking for example.
• For those who are excluded from the credit market, participants felt the government should consider benefit rates or the no interest loan scheme for those who cannot access credit offered at any rate.
• It was felt that to understand the limits of the market, it would be important to define the different sub-markets.
• It was noted that although the FCA has a good grasp of the credit market, it’s not always clear the FCA and the Financial Ombudsman Service are aligned. It was highlighted that this can drive regulatory uncertainty which may make lenders reluctant to lend.

17 November 2020 9.30-11.30

Discussion 1 – Where is (and isn’t) change and innovation occurring

Drivers for innovation

• It was noted that many of the new entrants to the unsecured credit market come from outside financial services.
• Broadly attendees agreed innovation is focused, although not entirely, on the consumer journey.
• There was a view that technology is facilitating innovation at point of sale, which is driven by the confluence of payment infrastructures.
• Two additional drivers for innovation identified were cloud and mobile. It was highlighted the move to cloud has allowed links between data-sets which can in turn drive innovation. Mobile hasn’t fully played-out but coronavirus, for example, has driven people into their homes and onto their mobile devices, creating new capabilities to meet existing consumer demands. It was also noted that mobile allows for a level of privacy which face-to-face lending doesn’t always bring.

Areas lacking innovation 

• Motor has seen less innovation than other areas, this was broadly attributed to the fact that buying a car is still a face-to-face transaction and so innovation isn’t been driven in the same way.
• In some cases, it was identified that there is too much focus on the ‘back-end’, once the consumer is already struggling, and there should be more emphasis on how innovation can prevent harm in the first place.
• It was highlighted the FCA needs to ensure there is fair and proper credit provision for vulnerable people who struggle with affordability. Credit Unions and Community Development Finance Institutions (CDFIs) are struggling, there is a contraction of high-cost lending and early signs of increased illegal lending.

Changing consumer preferences

• It was identified that where there has been innovation in credit products, many are designed to target younger consumers with a view to giving flexibility and avoiding persistent debt, although not all attendees agreed with the latter point worrying that these products could lead to a younger demographic getting into unexpected debt.
• It was highlighted there has been a reduction in credit card usage and a number of attendees agreed the move away from general purpose open lines of credit has potentially been driven by millennial preference for greater control.
• It was noted that some consumers like the integrated nature of point of sale credit with some of the new offerings helping them with budgeting and managing cash flows 
• Other attendees agreed the decline in open lines of credit was because of the convenience of accessing credit at point of sale, rather than having to go through the credit card application process and fear of being declined.
• Regardless of the drivers of change, attendees agreed regulation needs to keep pace with consumer borrowing preferences.

Open banking and AI

• There was concern that increased use of open banking and AI could lead to dehumanisation of the lending process, it was noted that credit is easier than ever to access but that many consumers don’t understand the potential risks which can lead to poor outcomes.
• Some attendees noted that availability, permissibility and use of data for regulated credit is still restricted.
• It was highlighted that artificial intelligence (AI) can be used to better understand vulnerability markers and the likely financial literacy of a consumer (allowing for better presentation of technical information).  
• Some consideration was also given to how AI could be used to improve lending decisions. It was acknowledged that AI will undoubtedly help with affordability assessments, and there was interest in how it can help lenders to spot credit dependency.
• Nonetheless a number of attendees highlighted the pressure lenders are under to look at every data point which can be overwhelming, particularly for smaller lenders. It was therefore suggested there needs to be greater help for smaller lenders to facilitate the processing of large volumes of data as they may not have the resources or capabilities of larger players in the market. 

Existing regulation and CCA

• A number of attendees highlighted that they felt the regulatory environment and legislation is a long way behind innovation in the market, with the Consumer Credit Act (CCA), in particular, felt to be outdated.
• There was a view shared by some attendees that penalties for non-compliance with the CCA are restricting innovation and entry into the market.
• It was highlighted that a lot of innovation is funded by venture capitalists but when they’re looking for innovative ideas they don’t want to fund ‘straight-up’ credit providers due to the regulations. As such, there was a view that the CCA exemptions have played role in allowing innovative new firms to get started.
• Many attendees shared the view the CCA needs to be reviewed and consideration given to how it can be made more flexible to allow for greater innovation in future.
• It was noted that regulation can create a barrier for innovation, it can limit scope of what commercial organisations are willing to do, due to potential ramifications. It was noted this wasn’t always a bad thing but the impact of regulation on innovation should be taken into account.
• A number of attendees agreed there was a desire for more of a level playing field across regulated and unregulated lending.

Impact of coronavirus

• There was concern that one of the effects of coronavirus would be less collaboration in business resulting in less innovation nonetheless it was noted that coronavirus has accelerated firms’ transition to a more digital offering.

Discussion 2 – Benefits and challenges from innovation

Financial literacy and education

• Attendees highlighted the importance of consumer control and that ease and lack of friction can reduce control, and it can be particularly harmful where the consumer has low financial literacy.
• There needs to be a balance between education and consumer protection – it was noted that in times of stress, people can find it difficult to think through complex problems, as such a combination of education and protection is essential.
• There was some concern that APR is complex and not a useful metric for all consumers, as such it was considered whether there could more be done to present information in a tailored way to target and make it clearer for consumers (eg where a firm knows the consumer has lower financial literacy, could the product information be presented differently).
• There is evidence which shows that confidence in maths and confidence in making financial decisions is correlated, research has shown that timely information can make a difference in a way that just having education doesn’t.

CRA data 

• There was a view that ‘debt is debt’ regardless of how you’re charged and that consumers can get into a situation where they have a lot of principle debt but it’s not reflected in credit reference agency (CRA) data. As such there can be a risk of distorted credit data resulting in distorted credit decisions. 
• There was a view that incomplete data files could be partially addressed by the effective use of open banking data.
• A number of attendees noted that coronavirus makes it harder to make the right lending decisions based on CRA data as a result of forbearance measures and credit masking.
• Attendees agreed there needs to be some consistency across data submission to CRAs.

Benefits versus risks of innovation

• There was a view that BNPL improves consumer choice and can minimise likelihood of consumers ending up in persistent debt however there was some concern about the presentation of the product on merchant websites.
• There was a broad view that innovation should facilitate and balance the right consumers getting access to debt.
• Attendees considered whether there should be a move to an outcome-based approach on data, one which is less prescriptive and therefore better supports innovation.
• It was noted that innovation is likely to help some consumers and harm others, it’s important for regulators to assess the potential harm of innovation before it happens.
• There was some concern that innovation is driven by merchant benefit, rather than consumer benefit; for example, retailers are subsidising lenders to create an uptick in their sales, the regulators should therefore consider how that impacts consumer behaviour.
• Consideration was given to whether more can be done to ensure intermediaries (e.g. merchants and employers) do more to look through an employee wellbeing ‘lens’, is there more that could be done to ensure intermediaries promote consumer needs.
• Attendees agreed regulators need to ensure there is alignment between firm and consumer interests and outcomes.
   

24 November 2020, 10.00-12.00

Discussion 1 – Role of regulation in unsecured consumer credit markets

Affordability/regulatory certainty

• Several attendees felt that the rules around affordability were unclear, although some attendees disagreed with this, and felt that the rules provided sufficient clarity.
• More generally, areas where regulation is more ‘flexible’ or less prescriptive was seen as creating uncertainly. It was felt that this uncertainty reduced incentives on people to enter, or invest in, the consumer lending. 
• Access to timely, accurate and comprehensive credit information was seen as vital. There were concerns that CRA data was not complete and that having to get data from multiple CRAs could be too expensive or burdensome for smaller lenders. Open Banking was seen to have a role to play in improving affordability assessments, but that it is still early days and more work is needed to improve the analysis of Open Banking data and to make it more accessible to smaller lenders. 
• In some cases, affordability requirements were seen to make smaller loans uneconomical to lenders. 
• Different interpretation of the rules or conduct by FCA and FOS seen to lead to uncertainty around how firms should behave and that this has had a ‘chilling’ effect on the market. Participants were asked to send the review team concrete examples.

Consumer information, Innovation and regulation

• Concern from some that regulation can slow down innovation. Where innovative firms take a long time to go through FCA authorisation, this results in a delay to innovation reaching the market. Some felt regulators needed to move faster to adapt to changes in the market. 
• Prescriptive rules around presentation of consumer information makes it harder to test new approaches. Some discussion about whether there is value in getting consumers to read T&Cs, knowing many will not bother as they want to access the product – it was noted that no-one reads all the T&Cs they have to sign in everyday life. 
• Problems raised around APR not being a useful representation of cost – underlying assumptions can skew the figure for different products, with credit cards given as an example.
• How far regulation achieves similar outcomes across similar products
• Several attendees were concerned around consumer outcomes with exempt deferred payment products. Some felt product raised similar risks to regulated credit but the lack of regulation meant consumers may have different outcomes compared with regulated products. Some attendees disagreed saying that the products were low risk and that the exemption was justified.
• Some felt the FCA should be clearer around outcomes and the split of responsibility between borrowers and lenders.
• Regulation of repeat lending and persistent debt raised as an area where outcomes could be clearer across products.

Discussion 2 – Impact of coronavirus and FCA response to the pandemic

• Generally agreed that it is hard to predict how impact will play out. Lenders have become more risk adverse and need more time to understand which groups of consumers and employment sectors will recover. 
• Credit masking is understood as a policy, but it was noted it has reduced the accuracy of credit information which has an impact on lending decisions. Infrastructure around credit information is complex and based on legacy systems (both in CRAs and firms which submit and receive data). This can make it hard to implement changes or new ideas (eg, a temporary flag for coronavirus) quickly.  
• Concerns raised around access to credit for higher risk consumers.