The Woolard Review, which was published on 2 February 2021, reports for the Financial Conduct Authority (FCA) on change and innovation in the unsecured credit markets and details what new regulatory expectations could be placed on lenders in the months and years to come. Although it does not make any changes to FCA regulation, the review sets out 26 high-level recommendations for the FCA and the government.
One of the FCA's main priorities is to ensure consumer credit markets work well. In its 2020 Business Plan, the FCA articulated a series of outcomes that attempt to set out "what good looks like" across the credit market. The desired outcomes that the FCA is currently focussed on are:
- consumers can find products that meet their needs;
- consumers do not become over-indebted by being given credit they cannot afford;
- affordable credit is available to smooth consumption; and
- consumers can take control of their debt at an early stage when they fall into financial difficulty.
The review agrees with this outcomes-focussed approach on the basis that too much product regulation could distort the market and give advantages to one form of credit over another. At the same time, the review appears to understands that lenders need clarity and certainty and a level playing field if the market is to operate well.
It, therefore, recommends that the FCA takes its outcomes-based approach a step further and sets out clearly what outcomes the market should be achieving at each stage of the consumer journey and lifecycle of a product, and how regulation can support that. In particular, the review recommends that the FCA articulates what the desired consumer outcomes are in the context of financial promotions, information disclosures, affordability assessments, persistent debt and repeat lending, forbearance, debt advice and solutions, and debt collection.
Prescriptive legal information disclosure requirements currently apply under the Consumer Credit Act, so it is not within the FCA's power to review these at present. However, in its 2019 Report on the Review of the Consumer Credit Act, the FCA said that it sees merit in repealing these information disclosure requirements and replacing them with FCA rules. The review underpins the importance of the FCA engaging with HM Treasury to drive reform of the Consumer Credit Act. It sees this as critical to improving outcomes in and the health of the unsecured credit market.
The review wants affordability to remain a significant area of focus for the FCA. However, it points to real concerns that the current outcomes-based rules in the FCA's Consumer Credit Sourcebook, or CONC, risk distorting the market, as they allow for considerable inconsistency of approaches as between firms.
The review does not advocate prescriptive rules, saying, quite rightly, that such an approach could lead to a burdensome and restrictive set of rules unable to respond to an evolving market, potentially cooling the market and deterring investors. It is, therefore, perhaps unsurprising that it sees access to good credit information as part of the solution here. Specifically, the review anticipates that firms will become increasingly dependent on the availability of credit-related information and new analytical tools. In the meantime, it calls for the FCA and the Financial Ombudsman Service to take forward a coordinated campaign to reduce perceptions of regulatory uncertainty in this area.
The review makes an important conceptual link between assessing affordability at the beginning of a credit relationship and continuing to monitor affordability through the life of a loan. While many lenders have separate "assessing affordability" and "identifying and responding to financial difficulties" buckets, the Review sees them as two names for the same thing. It views the FCA's outcomes-based approach as an opportunity to build on the expectation of firms to identify and reduce consumer harm throughout the customer journey.
The test case Kerrigan & 11 ors v Elevate Credit International Limited (t/a Sunny) (in administration)  EWHC 2169 serves as a reminder of why this is an important link for the review to make. Kerrigan confirmed that a breach of the FCA's affordability rules is likely to be highly relevant when considering whether there is an unfair relationship between the lender and the customer for the purposes of section 140B of the Consumer Credit Act 1974, which could entitle the customer to redress.
It is clear that access to relevant data will increasingly play an essential role in a firm's ability to demonstrate compliance with affordability rules. Accessing and analysing data sufficiently could present a challenge to some lenders, in particular those, with less sophisticated compliance and information gathering functions (see our previous Insight for more details on what the review has to say about access to credit information).
Farewell prescriptive rules?
Does the review signal the end of prescriptive product-based regulation? Since the FCA took over regulation of consumer credit in 2014, it has taken action in relation to a range of specific products, for example introducing a price cap for payday lending and introducing pricing rules for overdrafts. The review appears to imply that the FCA's product-focussed regulatory response may have been short sighted in some areas.
It has always been possible to use different legal credit structures to provide products that "feel" pretty much the same to the consumer. For example, general insurance premiums (or indeed any annual cost) could just as easily be financed by way running account credit or by way of repeat lending each year. The review picks up on this and expresses concern that high-cost fixed-term unsecured credit products are used by some customers in a similar way to revolving credit and that consumers are, therefore, at risk of suffering the same persistent debt problems as can be experienced by credit card and overdraft customers. This is arguably something that the FCA could have avoided if it had used more outcomes-based persistent debt rules across the unsecured credit market than product-specific ones in the first place. However, for both credit cards and overdrafts, the product regulation followed detailed market study activity by the FCA. The temptation to formulate rules designed for particular issues identified in each of those markets must have been overwhelming.
While the review indicates that new measures to tackle repeated use of and persistent debt in the unsecured credit market are desirable, it remains unclear what precise form outcomes-based regulation in this area could take. If the desire is to move away from prescriptive rules, then it would seem more likely that regulation could replicate the regime applicable to overdrafts, giving firms discretion (and potentially creating regulatory uncertainty). On the other hand, the risk of inconsistent approaches leading to different outcomes could drive a desire to define "persistent debt" or "repeat use" across various types of product.
What this mean for lenders
As always, the clear take away from the review is that lenders will need to continue to carefully record the rationale for everything that they do and with clear reference to outcomes. This means lenders will need to pay close attention to the data they collect and the ways in which it can be analysed, in order to ensure that their rationales can be backed-up by relevant management information.
Osborne Clarke comment
The Woolard Review does its best to articulate the tightrope that the FCA must walk: the benefits of outcomes-based regulation do need to be balanced with the risk of consumer harm that can arise from regulatory uncertainty and an unlevel playing field. With the review of the Consumer Credit Act and the increased FCA focus on outcomes, there will continue to be regulatory change with which lenders will have to contend.
Some comfort may be taken in the review's acknowledgement that structure and prescription remains an essential means to achieving consistent outcomes. However, there is no sign that compliance costs will reduce any time soon.