Urgent changes needed to make credit market fit for future, says Woolard Review

Regulation of the buy now pay later (BNPL) sector is one of a host of changes urgently needed to make the credit market fit for the future, according to the Woolard Review.

The review into the unsecured credit market was chaired by Christopher Woolard, the Financial Conduct Authority’s former interim chief executive. It was commissioned by the FCA Board.

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

The recommendations in the review, published on Tuesday, include:

– The regulation of unregulated BNPL products. Five million people have used these products since the start of the coronavirus pandemic.

More than one in 10 customers of a major bank using BNPL were already in arrears.

The Government confirmed on Tuesday that it does intend to legislate to bring interest-free BNPL products into regulation.

– Free debt advice services need secure, long-term funding as demand increases to as many as 1.5 million additional cases following the coronavirus pandemic. Funding needs to help the poorest pay fees when applying for debt relief orders.

– The FCA responded quickly and effectively in the emergency phase of the pandemic but 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.

– More alternatives are needed 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 also be done to encourage mainstream lenders into this sector.

– Regulation should be driven by the outcome being sought and how consumers use products in the real world. 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.

Mr 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.”

The FCA said it welcomes the review.

Charles Randell, chair at the FCA, said: “Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses.

“While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households.

“Many people have been able to reduce their debts, but some of the poorest in our society have exhausted any savings or run up more debts. All the authorities which cover debt and debt advice must act together systematically to prevent problem debt and to help people get out of a spiral of debt through properly funded debt advice.

“Regulation should be consistent and the review shows how we can ensure high standards in consumer credit regardless of the form of credit.”