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Our response to the FCA Woolard Review

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The Financial Conduct Authority (FCA) asked Christopher Woolard to lead a review of the unsecured credit market, concentrating on how regulation can better support a healthy market.

We have highlighted how the long history of consumer credit regulation in the UK shows that ineffective regulation can incentivise and even embolden firms to engage in bad practice. In the absence of effective regulatory policy, some firms will be incentivised to profit through exploiting consumer vulnerability, behavioural bias and constrained options.

In the years since the FCA was given responsibility for consumer credit, a number of interventions have sought to address long standing areas of consumer detriment, such as in the areas of payday lending, unauthorised overdraft charges and persistent credit card debt. Each problem had roots in incentives that misaligned the interests of firms and their customers.

The FCA, consumer advocates and firms should now know a good deal about the relationship between regulation and incentives from the perspective of effective consumer protection.

The FCA faces a number of existing and emerging challenges in the unsecured credit market:

  • Coronavirus has exposed pre-existing problems of low household financial resilience, insecure incomes and safety nets that are not always adequate, and highlighted the weakness of the forbearance framework to deal with temporary financial difficulties
  • Digitisation of credit products has created new risks of poor outcomes for consumers, particularly those with vulnerable characteristics such as mental health problems
  • Systemic weaknesses in credit information and credit information governance work against consumer interests and undermine effective regulation
  • New products that sit outside the regulated space are likely to impact use of regulated credit products and consumer protection objectives
  • There are unaddressed weaknesses in the regulation of unsecured credit that contribute to the scale of financial difficulty and problem debt in the UK

We would like one of the functions of this review to be to look at how well FCA remedies are working to change incentives and eliminate consumer detriment, and to consider how transparency on progress on the FCA’s stated policy objectives might hasten and embed change in the way firms think about incentives that drive consumer detriment. 

We would also like this review to consider how to actively incentivise the development of unsecured credit products and services that align with the interests of consumers who are vulnerable to debt and other harms.

We have also highlighted further priorities for the FCA in its response to this review and in its future programme, including:

  • Developing an effective duty of care, building on vulnerability guidance, which should ultimately be embedded in regulation and require firms to pursue a ‘fair by design’ principle and not seek to profit from exploiting consumer vulnerability, behavioural bias or constrained choice
  • Considering how credit information governance can be reformed to work in the best interest of consumers, and how to put in place a regulatory governance framework capable of ensuring new data technologies such as open data work in the interest of consumers
  • Learning from payment deferrals implemented during the pandemic, review how forbearance and CRA reporting guidance can best support people facing temporary difficulties
  • Undertaking a formal exercise to scope and evidence the need to bring unregulated products such as point of sale BNPL within FCA scope
  • Working with the government to end misleading promotions and information practices among lead generators in the debt solutions market

You can download our full response here.