When the Financial Conduct Authority took over regulation of the consumer credit market in 2014, it aimed to make the market fairer, cleaner and more sustainable.
Last year we reviewed how the consumer credit sector was performing under FCA regulation. Here we look at what has changed for the consumer credit sector since then, and how firms continue to adapt to their new regulatory regime.
On 20 March, Christopher Woolard, Executive Director of Strategy and Competition at the FCA, gave a speech to the Responsible Finance Conference in Glasgow titled ‘Beyond regulation: thinking creatively about consumer credit’.
In it, he outlined how the regulator has approached the industry, and looked at ways it might work better in future. He acknowledged the broad nature of the credit sector – from something that provides essential funds for families that need instant access to money at one end of the spectrum, to a convenient way of accruing airmiles or rewards at the other.
The range of companies and products makes the sector a complex one to regulate – Woolard spoke about the difficulty of ‘demanding rigorous standards while leaving some space for original thinking’.
And he said that, because credit is so integral to so many lives, the regulatory ‘stick’ is not always the right approach. Understanding the market, and the issues it faces, is a better way, he said, to solve those issues.
What is the FCA doing to regulate consumer credit?
The FCA clearly has credit on its radar. Its Business Plan for 2018-19 has ‘high cost credit’ as one of its priority areas.
In his speech, Woolard outlined a number of areas the Authority will focus on, including:
- Rent to own – where customers are likely to be particularly vulnerable. The regulator has already sought redress from certain companies – BrightHouse, for instance, which at the FCA’s instigation has paid out over £14.8 million in redress to nearly 250,000 customers.
- Identifying gaps in current regulation to ensure legislation keeps pace with the current market landscape. This includes new rules on persistent credit card debt, whereby firms will be required to help customers who face persistent debt lasting 18 months or more.
- Regulation of high-cost short-term credit (or ‘pay day lending’), where changes include a price cap introduced by the Authority in 2015.
What’s next on their radar?
Although he covered a number of success stories, Woolard was realistic about the sector, and candid about the fact that far from all issues are solved.
He cited unarranged overdrafts as an example of a product where customers – particularly vulnerable ones – can face disproportionately high fees and charges.
The regulator is also keen to look under the surface of credit statistics to see what is driving demand.
Woolard cited the example of social tenants turning to high-cost credit when moving at short notice into unfurnished flats – and talked about schemes run by some local authorities to provide alternative sources of credit for tenants in this situation.
The lack of mid-cost credit is another challenge facing the regulator, consumers and the sector as a whole.
2016-17 saw £22 million lent by responsible finance providers to over 55,000 individuals. But in 2016 alone, £1.9 billion was lent via high-cost home-collected credit and rent-to-own agreements.
Woolard made the point that a lack of supply means that – if all regulatory, information and co-ordination gaps were fixed tomorrow and all high-cost borrowers switched to mid-cost lending – existing providers would not be able to meet the demand.
So more regulation and education are not the entire solution. The FCA hopes to see ‘more models emerge in this market that can provide commercially sustainable, mid-cost lending’.
Testing new ways of thinking
To finish his speech, Woolard returned to a familiar theme – innovation. He talked about the need for competition and new approaches that drive value for consumers.
He praised the FCA’s regulatory sandbox – the safe space for testing new products and approaches – which he says is reducing the time and cost of getting innovative ideas to market: 90% of firms from the first cohort have gone on to market.
But he also mentioned that many people wrongly believe that this is an area where the regulator is only interested in fintech firms.
In fact, it wants involvement from firms of all types – traditional businesses as well as start-ups and fintech experts. This is something we have explored previously in How ready you are to be a disruptor?
In conclusion, Woolard reiterated that the FCA’s focus is on ‘ensuring fair outcomes for users of consumer credit’ and stressed his belief that drawing on the technologies at our disposal, and coming up with imaginative solutions, will be key to achieving this.
Find out how to comply with FCA rules on Treating Customers Fairly
If you work in the consumer credit industry and want to make sure you’re meeting the regulator’s requirements, getting up to speed with its Treating Customers Fairly rules is a good place to start.
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