Christopher Woolard’s review of change and innovation and the unsecured credit market dropped into the world on 2 February. It is in part a ‘point-in-time’ look at current issues in the credit market, with regulating buy-now-pay-later grabbing the headlines as something that needs to be done right now.
However, the strength of this review lies in its broader sweep and the understanding that a succession of problems in the credit market are linked by themes that remain under-addressed by regulatory and social policy.
A self-reflecting regulator is a good thing, and this one can look back on a huge amount of progress over the last six years or so. The high-cost credit review was ground-breaking work that tackled a bunch of ancient evils.
This is still work in progress but produced one of the best lines from a regulator I can recall in 16 years of consumer advocacy. Explaining the justification for a goods price cap on rent-to-own agreements, the policy statement said, “we needed to intervene… because a highly vulnerable group of consumers are paying too much for household goods”.
A highly vulnerable group of consumers are paying too much — ten words that succinctly capture the confluence of consumer needs, vulnerabilities, market outcomes and public policy concerns that explains why, in one way or another, consumer credit always seems to be on the agenda.
So the review’s focus on outcomes is as welcome as it is central to what should come next in credit. The smaller (yet crucial) part of this is the need for clearer and better articulated regulatory outcomes to focus and drive FCA interventions to a conclusion.
The FCA is stocked full of top-class brains doing world class analysis to frame and quantify problems; but we often see a disconnect between analysis and effective remedies through want of a clearly defined set of final outcomes.
For instance, the credit card market review delivered excellent analysis on persistent debt, while the remedy package focused on saving consumers money (fair enough) rather than stopping persistent debt (a broader set of harms). The review’s focus on ‘credit builder’ products is arguably another bit of outstanding business from the credit card review. The point on outcomes is well made.
The review then gets bigger in ambition; calling out the ‘opportunity for the regulator to set out clear outcomes which a healthy credit market should be achieving across all products and sectors.’ Spot on.
The FCA has had a good half a decade to look at the market and ‘clean up Dodge’.
Now there needs to be a sense of endpoint — an expectation as to what a credit market that is safe and fair to all its customers looks like.
This plays into the HMT future of financial services regulation review that we hope will give the FCA the scope and objectives to make that market a reality.
It speaks to our concerns on the need for a duty of care approach that would ensure firms do not exploit consumer vulnerabilities, biases and constrained choice. It speaks too to ongoing concerns about how the FCA approaches the governance of innovation.
The review picks this up in concerns about online lending and digital exclusion, but the point goes further into Open Banking, Open finance and the need for public and regulatory policy to be pro-active in ensuring an increasingly digital and data-based economy meets the needs of consumers that the market would otherwise underserve.
We have seen innovation governance fail in consumer credit markets and here the review speaks solid truth to both the market and policy makers: ‘…from a holistic perspective the biggest potential harms occur where there is a need for those on lower incomes or benefits to borrow’.
Spot on again.
We all know this and have done so for at least 20 years (remember those reviews in the run up to the 2006 Consumer Credit Act?). But getting to a holistic, effective approach to both managing and preventing financial difficulties remains difficult. It has a lot of moving parts and pushes well outside of the FCA’s regulatory scope and deep into social policy.
Forbearance is a response to financial difficulty that the FCA does have a good deal of control over, and the lessons and challenges still to come from Covid-19 make this a good time to take stock. The FCA’s quick and intelligent response to Covid-19 has been good on the whole; both understanding the need for very explicit guidance on repayment affordability and consumer worries about the impact on their credit status from asking for help.
Our client survey work highlights credit score worries as a significant barrier to seeking advice earlier, so there is likely to be a real harm reduction value in the FCA looking closely at credit information reporting from a consumer interest perspective.
The massive and rapid uptake of payment deferrals suggests that consumers are more confident to ask for help earlier where there is a clear and certain pay off, consistency across lenders and some protection against fears of financial exclusion later.
The current forbearance framework is far from broken, and the temporary Covid guidance has made it better in some respects; but being rooted in the (old but good) OFT debt collection guidance its focus is a fairly narrow set of conduct outcomes.
A healthy consumer credit market would be doing more to manage and internalise the credit payment risks that can turn customers’ negative life events into serious financial difficulties.
As someone who was heavily involved in consumer advocacy on payment protection insurance, the outcome we were looking for was not just a refund for consumers (albeit a refund so big that Keynes would call it a stimulus!), but a better set of tools to support consumers through income shocks without being pitched into problem debt. More unfinished business.
Our 2019 work on sub-prime cards highlighted the problems that follow when people on low incomes are borrowing to try to manage financial difficulties and/or make ends meet. Our Life Happens report published around the same time showed how using credit as a safety net significantly increases the likelihood of experiencing serious debt problems. For the lowest income, most financially vulnerable people on working-age benefits, the unsafe credit safety net is more likely to include loan sharks, scams and very high-cost credit.
In touching on the need for alternatives to high-cost credit, the need to tackle loan sharks and the inherent vulnerability of low income consumers borrowing to make ends meet, the Review levers open the crack at the heart of the FCA’s consumer protection mission with respect to credit.
Regulatory policy can do fairness, but only social policy can seriously address need.
For over twenty years the idea has lingered that somehow the financial services market can provide a way of managing income poverty and poor financial resilience.
That hasn’t worked, and the Review points in the right direction in suggesting the need for a more socialised credit for those whose vulnerabilities, biases and constrained choices put them at greatest risk of harm from the commercial market.
Our call for a no interest loan scheme to be quickly established at scale reflects this. We hope that the review’s call for the FCA, Government, alternative and mainstream lenders to work the problem takes root.
By Peter Tutton, Head of Policy Research and Public Affairs, StepChange Debt Charity