The regulated consumer credit sector has seen high levels of market activity in the wake of the pandemic, particularly as many people experienced a decline in their financial circumstances and an increase in borrowing. But market activity isn’t the only noteworthy observation, as important regulatory developments are also afoot. In addition to general proposals around the FCA’s approach there is specific activity regarding buy-now-pay-later, vulnerable customers and affordability assessments.
The FCA’s approach
In its own words, the FCA is becoming more innovative, assertive and adaptive when it comes to exercising its market and supervisory duties. This means that the FCA intends to better utilise data and technology in decision-making, make full use of its powers, and maintain flexibility in its approach to react quickly when needed.
Against this backdrop, the FCA points towards its proposals for a new Consumer Duty. Such proposals are highly relevant to the consumer credit sector given the nature of the lender-borrower relationship and potential impact on consumers that fall into further financial difficulty.
It was noted that at the outset of the pandemic, credit firms quickly and effectively adapted their processes and communications to deliver good outcomes for their customers. Whilst this should remain a focus for firms, it is likely that this focus will increase with the introduction of the proposed Consumer Duty, as firms will be required test what happens when consumers use their products and services and remedy where credit products cause financial harm or do not deliver the right outcomes.
The FCA is planning a further consultation on the proposed rules and its approach to supervision and enforcement later this year. Given its relevance, credit firms will no doubt be eagerly awaiting such proposals. You can read our previous blog on the consultation paper in relation to the proposed Consumer Duty here.
Regulation of buy-now-pay-later
The Woolard Review identified an urgent need to regulate the buy-now-pay-later industry, given concerns raised over a lack of affordability checks and customers already being in arrears before utilising buy-now-pay-later products. Many customers also lack the awareness that they are in fact entering into credit arrangements.
Despite concerns, and given its momentum, the merchant-funded buy-now-pay-later model has become a popular alternative to high-cost short-term debt products, and the introduction of a new regulatory framework may bolster the industry’s credibility and provide additional legitimacy to the benefit of consumers. Buy-now-pay-later providers will still need to address issues around customer affordability and information exchange with existing market players such as traditional lenders and credit reference agencies, however there are wider developments within the fintech space to address some of these areas.
The FCA recognises that buy-now-pay-later products can have important benefits for consumers, but that it also carries risks and the potential for harm. The FCA’s aim is to revisit the boundaries of what constitutes regulated and unregulated credit and address how consumers engage with credit products in the real world. The Government is expected to consult on a proposed regulatory framework for buy-now-pay-later in the coming weeks, after which the FCA is planning its own consultation regarding its rules to set clear standards for firms.
Protecting vulnerable customers is high on the FCA’s list of priorities, particularly with its renewed focus on consumer outcomes and needs. The FCA makes clear that it wants firms to take particular care with customers in vulnerable circumstances and at greater risk of harm, recognising that those customers may need more help with decision-making, may be more susceptible to behavioural biases and may be less able to manage debts.
Interlinking significantly with the FCA’s proposed Consumer Duty, firms will need to pay particular attention not just to how they treat vulnerable customers, but also to how they identify customers in vulnerable circumstances or those at greater risk of harm. Whilst consumer credit firms will already have implemented systems and processes with this in mind, the consequences of the pandemic and other recent market experiences act as a sage reminder on the breadth of factors relevant to vulnerability – and also how circumstances of individual consumers can change fairly speedily and dramatically.
Given the focus, it may be prudent for firms to consider the mechanisms that they have in place to identify vulnerable customers, and the adequacy of those mechanisms, as well as the regularity with which they assess customers’ vulnerability to account for the possibility of changes over time.
Affordability and credit information
Affordability considerations are, of course, not just confined to buy-now-pay-later firms. All credit firms will need to address the shift towards accounting for the impact that entering into a credit arrangement will have on the customer, and not just the customer’s ability to repay.
The quality and availability of credit information plays a vital role here. The FCA has restarted its Credit Information Market Study following the recommendations of the Woolard Review and plans to publish its interim report with its findings and vision for the credit information sector in the first quarter of 2022.
The Study is also focused on assessing technological changes that may alter the way people interact with their credit information such as the greater uptake of Open Banking. Open Banking is likely to be a key theme in this area driving a shift in the way firms both access, and assess, consumer credit data. Whilst Open Banking can be beneficial in facilitating the move to ‘affordability’ assessments and away from mere ‘creditworthiness’, there is debate around just how revolutionary solutions can be given Open Banking’s current state of development and data limitations (only payment data). For now, firms may still be required to rely on traditional sources of credit information, again prompting considerations around how firms take a holistic approach to affordability. Of course, future evolution should be expected.
You can read the FCA’s position on next steps in consumer credit through a speech made by Nisha Arora, its Director of Consumer and Retail Policy.
Written by Brandon Wong
“We are increasing our focus on consumer outcomes and needs … and bringing … [a] more innovative, more assertive and more adaptive approach” Nisha Arora, Director of Consumer and Retail Policy, FCA