The Woolard Review sets out how regulation can better support a healthy market for unsecured lending, taking into account the impact of the coronavirus pandemic, changing business models and new developments in unregulated buy-now pay-later (BNPL) unsecured lending. The Review was commissioned by the FCA Board.

Christopher Woolard said: “Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone. New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty.

“Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic.

“Alongside these urgent issues the Review sets out a series of recommendations for how the FCA, working with partners, can build a better market in future.”

UK households have nearly £250 billion of outstanding consumer credit debt and more than 42.5 million people used consumer credit in 2019.

The Review sets out 26 recommendations to the FCA, sometimes working with Government and other bodies, to make the unsecured credit market fit for the future, including:

• The regulation of unregulated buy-now pay-later: BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the coronavirus pandemic.The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm. For example, more than one in ten customers of a major bank using BNPL were already in arrears. Regulation would protect people who use BNPL products and make the market sustainable.
• Debt advice: The provision of debt advice will be critical to a sustainable market in the long term, especially through the recovery from coronavirus. Free debt advice services need secure, long-term funding as demand increases to as many as 1.5 million additional cases, following the pandemic. Funding needs to be in place to help the poorest pay fees when applying for debt relief orders.
• Forbearance: The FCA responded quickly and effectively in the emergency phase of the pandemic – it needs to sustain this response through the recovery, for example by looking at whether it should revise its rules and guidance to drive greater consistency in the type of support firms offer consumers struggling to pay.
• Alternatives to high-cost credit: A sustainable credit market needs more alternatives to high-cost credit. The FCA should work with the Government and Bank of England to reform the regulation of credit unions and Community Development Finance Institutions. More should be done to encourage mainstream lenders into this space.
• Outcomes focused: Regulation should be driven by the outcome being sought and how consumers use products in the real world. Regulation should deliver similar protections where consumers face similar harms. In addition to making sure products are affordable, there should be an increased focus on lenders meeting consumers needs’ for as long as they hold the product. The FCA should review repeat lending.

Commenting on the results of the review, David Kenmir, PwC partner, said: “While all of the recommendations made by Chris Woolard seem sensible and will contribute to improving outcomes for consumers with unsecured credit, the FCA and Treasury will need to prioritise their actions. It’s clear that regulation of Buy Now Pay Later (BNPL) is the top priority and will be acted on imminently.

“From a fair competition and consumer protection angle, bringing all BNPL products within scope is a logical move for HM Treasury and the FCA. It will level up the playing field between BNPL and more traditional types of credit though the FCA must balance the need to protect consumers with the need to enable them to access simple, accessible and affordable credit.

“Aspects of the rules that relate to revolving credit products may usefully be applied to BNPL products, such as facilitating a smooth process at the point of sale, but without tempting customers to take every purchase on credit.”

He added: “The emphasis on improving the way the market works for the less well off in society; the potential detriment that arises from repeat lending; the importance of new market entrants into this sector; the potential benefits from a more consistent approach to forbearance and attempts to improve the quality of data provided to, and as a result by, Credit Reference Agencies are all welcome.

“To help ensure customers remain fully informed and empowered to make their own borrowing decisions, work is needed across the board to update the FCA’s approach in a digital age. Not only should disclosures be considered, but the policy framework relating to the end product lifecycle would benefit from more digital alignment.”

Mr Kenmir concluded: “The FCA’s approach to supervision needs to be adapted to a world of straight through processing and online self-service solutions for consumers that do not generate the traditional paper trails that the financial services market is used to.

“The world in which advertising has focused on speed of decision as opposed to any other elements of the product - or indeed the consumer’s ability to repay the loan - in order to increase the attractiveness of products to consumers, will also need to change.”