Unsecured credit

Important changes for the unsecured credit market – FCA publishes Woolard magazine – Consumer Protection

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On February 2, 2021, the Financial Conduct Authority (FCA) published the highly anticipated Woolard Review, an important and far-reaching review of change and innovation in the unsecured credit market. The report contains 26 recommendations for the FCA, government and other agencies, including an urgent recommendation to get all immediate purchases to pay later (BNPL) products within the scope of FCA regulations. Walker Morris consumer credit expert Jeanette Burgess summarizes the report and offers her practical ideas.

Brief history

The FCA Board of Directors tasked former FCA Interim CEO Christopher Woolard to undertake the review in September 2020, supported by an advisory group. The review focused on how regulation can better support a healthy unsecured loan market. He took into account the impact of the Covid-19 pandemic on job security and credit scores, changes in business models and new developments in unsecured loans, including the growth of non-secured products. regulated in the retail trade and in the workplace. The terms of reference are set out in Annex 1 of the report.

Urgent recommendations

Of the 26 recommendations set out in the report, three are highlighted as particularly urgent:

  • The FCA should work with the Treasury to ensure the necessary legislative changes are made to bring BNPL products within the scope of the regulations (the government has already confirmed by correspondence that it agrees with recommendation and that legislation will be introduced as soon as time permits).
  • The FCA must immediately coordinate with the UK government, decentralized administrations and insolvency regulators to ensure that appropriate debt solutions are available to better serve those in financial difficulty. This should include identifying swift actions to remove or reduce barriers to accessing suitable solutions (including fees) and measures to reduce consumers pushed to unsuitable solutions (including the role played by the marketing in this area).
  • Working with lenders and credit reference agencies, the FCA should conduct a review of how forbearance is reflected in credit information and how this affects decisions made by lenders and consumers. This includes assessing the potential impact of the approach taken to “masking” credit reports.

FCA has accepted the recommendations of the review and will incorporate them into its business planning. Further details will be given when the next Business Plan is published in April 2021.

BNPL products and the exemption from article 60F (2)

While it is recognized that unregulated BNPL products can be a useful tool for managing personal finances, the potential harms identified include: poor understanding of the product by consumers; insufficient protection of vulnerable consumers; lack of appropriate affordability assessments; lack of visibility of BNPL’s liabilities to other lenders; and the potential to create high levels of debt.

The examination focuses on BNPL products which are currently outside the scope of the FCA, i.e. unregulated BNPL credit contracts which are based on the exemption provided for in Article 60F (2 ) of the Regulated Activities Ordinance. As the report explains, these arrangements often take the form of deferred payment or short-term loans. Before responsibility for consumer credit transferred to the FCA, the exemption was previously under the Consumer Credit Act 1974 (ACC). It was limited to 4 installments within 12 months, but was increased to 12 installments upon transfer to the FCA. The report indicates that the exemption from CCA was never provided for this type of product but only for short-term bill deferral.

The report acknowledges that BNPL’s providers are not the only companies to avail themselves of the Section 60F (2) exemption, noting that it is also used by various non-financial companies offering interest-free loans, for example. dentists for reimbursement plans and sports clubs. for contributions. In recommendation 18, the report states that in defining the regulatory framework for BNPL, the FCA and the Treasury should be careful not to include other non-financial organizations that rely on the current exemption, including health and sports clubs. The government has also stated that it is important that BNPL’s regulation does not unintentionally result in other low-risk daily business activities that use the existing exemption for short-term deferral of payment, such as subscriptions to a gymnasium and sports subscription providers, in regulation.

There is no mention of the insurance industry, which relies on the exemption in the same way to allow policyholders to spread the payment of their annual premiums in monthly installments throughout the year.

What does this mean for businesses that take advantage of the exemption?

It is clear from the report and from the correspondence between Christopher Woolard and the government that it is BNPL’s unregulated retail activity that is causing the concern, fueled by the rapid rise e-commerce during the pandemic (among other factors). The exemption was intended for short-term deferral of payment and not the type of widespread use currently seen in the retail industry.

Regarding the next steps, the government will take into account the views of consumers, suppliers and retailers through a formal consultation process in order to understand the impacts that this regulation could have. The report says that once the FCA has the necessary powers, it will need to develop a proportionate regulatory framework, including addressing how credit reporting should work in the market.

It will also be necessary to take into account the regulatory treatment of partner retailers. Once the exempt BNPL agreements have been introduced into the regulatory scope, the merchant must be approved for credit brokerage. Given the wide range of retailers in the market, the scheme will need to be proportionate; becoming a designated representative for credit brokerage is an alternative to having to seek direct authorization for such businesses.

While the reform effort is clearly focused on bringing all BNPL products into regulation, it seems very likely that consideration of the exemption and all of its current uses will be part of this discussion. Careful and precise drafting will be necessary to achieve the objectives of the BNPL regulation without preventing the effective use of the exemption found in many other sectors or creating legislative loopholes. Any business currently operating on the basis of the Section 60F (2) exemption should carefully monitor and consider the consultation and may wish to respond, depending on how the way the proposals are ultimately worded affects their business.

Other key recommendations

Other key recommendations include:

  • encourage the development of alternatives to high cost credit
  • build a better credit information market
  • ensure that guidelines are in place for digital design in the consumer credit sector that focus on good outcomes for consumers, so that consumers are informed and remain in control of their decision-making
  • take a results-based approach to regulate the credit market, clearly state what the market is expected to achieve at each stage of the consumer journey and product lifecycle and how regulation can support this
  • conduct a restitution review.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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