Woolard Review sets out vision for unsecured credit: now over to the FCA to make it happen

The Woolard Review team has acted swiftly in publishing their recommendations to the FCA, publishing their findings just over two months after the initial Call for Input closed. The Review contains a number of recommendations on how to improve the unsecured lending market, though much of the detail on how these outcomes should be implemented is left to the FCA. The industry is likely to have mixed reactions to the Review, with many reserving judgment until there is more clarity on how it will impact the regulatory regime and how exactly this will affect lenders.

The Woolard Review recognises that the unsecured credit market has been rapidly evolving, both in light of innovative new products and broader economic changes as a result of Covid-19. The Review concludes that more needs to be done to ensure a healthy, sustainable market. It discusses a number of key emerging issues and sets out 26 recommendations for how the FCA should take these forward.

Key recommendations include:

- Regulation of new credit products

The Review recommends that the FCA and Treasury work together to ensure that all Buy-Now-Pay-Later (BNPL) products are brought within the regulatory perimeter “as a matter of urgency.” This sense of urgency is emphasised in a letter from Christopher Woolard to John Glen (Economic Secretary to the Treasury) explaining the need for regulation and describing the objectives of a new regulatory regime for those products.  The recommendation has been swiftly accepted by the Treasury and the next stage will be a consultation on the changes required to the Regulated Activities Order.  There is some recognition that the current exemption is beneficial in some circumstances and it will be important for impacted firms to feed into the consultation to ensure the usefulness of the exemption is not lost completely. Although the FCA and the Treasury are keen to move forward on this quickly any change in scope will take time to implement with careful consideration needed to ensure fair treatment of any firms which operate in this market  wholly outside the FSMA regime.

The report also considers whether Employer Salary Advance Schemes should be regulated. It concludes that these products are lower risk and creating a bespoke regulatory regime at this stage would be disproportionate. Instead, the FCA should continue to monitor the market and take action if necessary. Woolard also suggests that providers and employers draw up a code of best practice which could be recognised by the FCA.

- Monitoring long-term impacts of Covid-19

  • Issue: the Review recognises that the FCA acted swiftly and decisively to mitigate the short-term impacts of Covid-19 for consumers. However, the crisis will have long-term implications for some people and the overall impact will likely depend on the broader economic recovery.
  • Recommendation: the FCA should continue to act in a decisive and rapid way to manage emerging harms caused as a result of the pandemic.

- Forbearance reporting at CRAs

  • Issue: in the early stages of the pandemic, the FCA required lenders to ensure that any Covid-19 related payment deferrals were ‘masked’ on credit files. Whilst helpful, it reduced transparency and accuracy of credit information.
  • Recommendation: the FCA should engage with the industry to determine whether there are alternative ways of reporting which ensure that credit information better reflects individual circumstances – for example, through the use of a temporary or ‘neutral’ marker which reflects the fact that a customer may need longer-term help because of Covid-19.

- Strategy for debt advice

  • Issue: the pandemic has placed more pressure on the free debt advice sector, with Woolard estimating that between 1m – 1.5m additional consumers will turn to debt advice in 2021.o 
  • Recommendation: the FCA should work with the Money and Pensions Service, government and other agencies to ensure that there is a long-term, multi-year strategy in place which is securely funded and will meet the increasing demand.

- Access to suitable debt solutions

  • Issue: as well as having access to free debt advice, consumers should be able to access to suitable solutions and paths to recovery. The report describes the Individual Voluntary Arrangement market as “broken” amid an increasingly high percentage of failed arrangements, and Debt Relief Orders (DROs) being subject to disproportionately high fees.
  • Recommendations: the FCA should “without delay” co-ordinate with the UK government, devolved administrations and insolvency regulators to help remove barriers to debt solutions and ensure they are available to those most in need. It should also work alongside the Insolvency Service to create a long-term vision on how the IVA and Protect Trust Deed (PTD) markets should operate in order to remain effective. Finally, the FCA should explore the possibility of an ‘emergency fund’ for consumers who cannot cover the cost of DRO applications or otherwise consider how the fee could be amended, waived or reduced.

- ‘Credit builder’ products

  • Issue: some lenders offer ‘credit builder’ products, involving granting a small line of credit which, once repaid, is increased to a slightly larger limit. This helps manage lender risk and helps the consumer build their credit scores. However, they are seen by many consumer groups as a pathway into debt.
  • Recommendation: the FCA should consider whether existing ‘credit builder’ products are effective and if not, limit the use of phrases such as ‘credit builder’. It should also include a theme in the Regulatory Sandbox on products which help consumers build their financial resilience.  It is worth noting that this is already an area of focus for many Fintechs.

- Credit Unions

  • Issue: Credit Unions are an alternative to high cost credit and enable wider financial inclusion. However, the relevant legislation is dated and limits the variety of products offered.
  • Recommendation: the FCA, Bank of England, Treasury and Northern Irish government should consider whether there is scope to update the relevant  legislation so that credit unions can expand their product offerings.

- Mainstream lenders’ access to the alternative credit market

  • Issue: mainstream lenders could benefit the alternative credit market with their economies of scale, experience and expertise. However, there are few incentives for them to enter the non-prime market and are generally wary of the reputational repercussions of anything other than low-cost credit.
  • Recommendation: the FCA should work with industry leaders, HMT and Fair 4 All Finance to discuss the participation of mainstream lenders in providing alternatives to high-cost credit. The FCA should also make sure that consumers are aware of these alternative forms of credit.

- Outcomes-based regulation?

Whilst the Review recognises that product-specific prescriptive rules are sometimes useful, the Review also considers the benefits of outcomes-based regulation which ought to ensure consistency across all products and sectors. Areas of discussion include:

  • Affordability: a number of respondents to the Call For Input raised concerns about the outcomes-based nature of CONC 5.2A and the fact that this could result in action from the FOS. However, Woolard considers that imposing prescriptive rules could lead to burdensome and restrictive rules. The report also recommends that the FCA and FOS should take forward a co-ordinated campaign to reduce any concerns around regulatory uncertainty, particularly for affordability issues.
  • Repeat lending: more providers are offering multiple small loans which act like revolving credit facilities. Although there is a place in the market for these products, the FCA should consider whether clear outcomes are needed covering repeat lending and persistent use across all products. This should look at whether consumer additional protections are needed. 
  • Forbearance: in the early stages of the pandemic, the FCA introduced prescriptive requirements on the treatment of customers who requested forbearance. The FCA should review its overall approach to forbearance and set clear outcomes for processes and responsibilities. A more structured and prescriptive approach may benefit both consumers and firms.
  • A flexible regulatory regime: the Review recognises that to achieve a consumer credit regime that is readily able to adapt to change and promote innovation changes are needed both to the Consumer Credit Act 1974 and the FCA Handbook.  The FCA should engage with Treasury to prioritise this reform with much of the groundwork already contained in the FCA’s March 2019 review of the Act.  This reform should also recognise the potential freedom resulting from Brexit and the greater flexibility around information disclosures such as the APR calculation.

Next steps

With both the Treasury and the FCA welcoming the review it seems certain that many of the recommendations will be taken forward at pace.  Of course that pace is unlikely to match the speed with which the Woolard Review was concluded but even so we would expect some of the initiatives to move forward in the course of 2021. It is therefore important to not only consider the Review and its findings but also be prepared to engage further as the FCA and others seek to act on the recommendations.

We will be holding a webinar on Wednesday 24 February to discuss the Review but in the meantime if you have any questions please contact us.


Authored by Liz Greaves and Julie Patient


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