Christopher Woolard’s review of change and innovation and the unsecured credit market 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. Peter Tutton, head of policy research and public affairs at debit charity Step Change, writes
The strength of the Woolard 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 a 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”.
These words succinctly capture the confluence of consumer needs, vulnerabilities, market outcomes and public policy concerns, explaining why consumer credit always seems to be on the agenda.
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.
With the FCA, 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 rather than stopping persistent debt. The review’s focus on ‘credit builder’ products is arguably another bit of outstanding business from the credit card review.
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.
Now there needs to be a sense of endpoint: an expectation as to what a credit market that is safe and fair looks like.
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. However, 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.
Response to Covid-19
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 overall.
Our client survey work highlights credit score worries as a significant barrier to seeking advice earlier.
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.
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, the unsafe credit safety net is more likely to include loan sharks, scams, and very high-cost credit.
There is a need for alternatives to high-cost credit – regulatory policy can do fairness, but only social policy can seriously address this 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 who are vulnerable.
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.