The Woolard Review: Buy-now-pay-later firms to be regulated by the FCA

Who is affected?

The recommendations apply to:

• consumer groups,
• regulated and unregulated providers of credit,
• trade bodies,
• retail businesses,
• employers.

A summary of key recommendations:

The Review sets out 26 recommendations to the FCA, the Government and other bodies to ensure a better unsecured credit market in the UK.

Key recommendations are highlighted below, the first three being noted as particularly urgent:

1. Regulating Buy-now-pay-later (BNPL) products. BNPL should be brought under FCA regulation as soon as possible. The unregulated BNPL market has more than trebled in size in 2020, with 5 million people using these products since the start of the pandemic. The Review considered that there is huge scope for potential consumer harm, for example more than one in ten customers of a major bank using BNPL were already in arrears. The FCA should develop a proportionate regulatory framework to avoid such harm to consumers and ensure it is sustainable.

HM Treasury has announced that it intends to regulate BNPL products.

2. Good debt advice services to underpin a healthy credit market. Strong provision of debt advice will be critical to a sustainable market in the long term, especially during the recovery from coronavirus after which an additional 1.5 million people may require some form of debt advice. The FCA alongside the UK government, devolved administrations and insolvency regulators must work together to ensure suitable debt solutions are available to help those facing financial difficulties. To achieve this, barriers to accessing suitable solutions should be removed or reduced and consumers should not be driven towards unsuitable solutions.

Free debt advice services need secure, long-term funding as demand increases and further, funding should be put in place to help the poorest pay fees when applying for debt relief orders (DRO). The FCA should discuss with government whether an emergency fund could be provided to cover such costs.

3. Ensuring there is a sustained regulatory response to coronavirus including through more prescriptive approach to forbearance. The FCA’s response in the early part of the pandemic was quick and effective and the regulator should sustain this response throughout the recovery period. This should include work to achieve a more prescriptive and consistent approach to forbearance, so consumers in financial difficulties can benefit from this as quickly as possible.

The FCA should conduct a review of how forbearance is reflected in credit information and how this affects decisions made by lenders and consumers. The regulator should:

• assess the potential impact of the approach taken to the ‘masking’ of credit files,
• look at current arrangements for reporting forbearance to Credit Reference Agencies (CRAs) and whether they are consistent and adequate, and
• identify areas where credit information could better reflect individual consumer circumstances and respond in a more nuanced way to changes in those circumstances.

4. A sustainable market needs more alternatives to high cost credit. The FCA is urged to co-operate with the Government and Bank of England to reduce consumer harm in this area. Despite efforts to encourage more alternatives to high-cost credit further reform is needed, including liberalisation of the approach taken to regulating credit unions, allowing them to expand their product offering. In addition, mainstream lenders should be encouraged to participate at lower costs.

The FCA is encouraged to work with Fair 4 All Finance to identify and address barriers which prevent consumers having a better awareness of alternative credit products. Where regulatory barriers are identified, they should be removed where appropriate.

The regulator, HM Treasury and Responsible Finance should report on ways to increase the lending capacity of Community Development Finance Institutions (CDFIs), for example through subsidies or the development of investment incentives.

5. Building a better credit information market. This would underpin a healthy operation of the market, reinforcing affordability and the systemic sustainability of the credit sector. Here lies an opportunity to build a better system for the future and not just take a reactive approach.

The FCA should resume its credit information market study and identify how improvements could be made in the speed and sharing of information across the credit sector. Through this study or as part of a wider strategy, the FCA should:

• make clear the outcomes that the market needs to achieve for consumers and lenders, and how these will support a healthy credit market, including where consumers interact directly with CRAs and credit information services (CISs)
• assess whether the credit information market is operating in a way that enables consumers who use credit responsibly to build their credit file and access more credit options
• consider whether a mandatory reporting requirement would drive better outcomes for consumers
• consider the case for introducing rules to require creditors to report to courts when a county court judgement has been satisfied or partially satisfied, to drive up the quality of existing credit information
• identify and address barriers to widespread use of open banking data, with particular attention to alternative credit providers.

In addition, the FCA should conduct work to identify whether ‘credit builder’ products are effective in supporting consumers access a wider and cheaper range of products. If not, the FCA should take steps to limit the use of terms like ‘credit building’. The regulator should also include a theme on a future cycle of the Regulatory Sandbox to accelerate the growth of products that support consumers transition from high to low-cost credit, thus increasing their financial resilience.

6. Regulation focused on outcomes. The FCA should use its Business Plan Priority to take an outcome based approach to regulating the credit market and to set out what the market should be achieving at each stage of the consumer journey and lifecycle of a product and how regulations can support that. Outcomes should also be developed around the recovery of consumers who have faced financial difficulties and their ability to access credit over time. These outcomes should be public to make sure firms have clarity about the direction of future regulation. It is highlighted that the FCA should review repeat lending.

The Review outlined further recommendations including:

• Consumer Credit Regulation. Changes will be needed to both the Consumer Credit Act 1974 (CCA) and the FCA Handbook. Much of the groundwork for CCA reform has been laid out by the FCA’s 2019 report.
• Brexit. The FCA should consider and identify what additional flexibility might be achieved on consumer credit regulation following the exit from the EU, for example around the annual percentage rate (APR) and the inclusion of examples of the cost of credit in pounds and pence.
• Employer salary advance schemes. Wider regulation of ESAS might not be immediately necessary but the FCA should continue with a proportionate approach and monitor market developments and protect individuals from risk. The FCA alongside the Government should encourage ESAS providers to use a Code of Best Practice. Major employers should only contract with ESAS adhering to this code.
• Growth of online lending. The FCA should have Guidance for digital design in the consumer credit sector that focuses on good consumer outcomes and ensuring consumers are informed and in control of their decision-making. Further, the FCA should consider updating its disclosure requirements to make them more suitable to a digital age.
• Forbearance. Building on temporary guidance it has published, the FCA is encouraged to conduct policy work to review its overall approach to forbearance.
• Repeat lending. The FCA should conduct a review of relending which sets out clear outcomes covering repeat lending and persistent debt across all products. It should explore whether additional protections or guidance is needed around the 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.

Next steps

The FCA emphasised that one of its five key priorities is ensuring that consumer credit markets work well. The regulator stated that it has considered and accepted the recommendations which are directed at the regulator and will build them into its business planning. Further details of the FCA’s response will be given when its next Business Plan is published in April 2021.

The FCA, as recommended, intends to report on its progress in a year’s time and annually thereafter if necessary, on progress.

Where recommendations are directed at others, the FCA urges them to act on the Review’s findings.

Article co-authored by Anna Burdzy.