On 16 September, the Financial Conduct Authority (FCA) announced a review into unsecured credit market regulation.
This will be chaired by Christopher Woolard, the outgoing interim Chief Executive, which suggests how seriously the FCA sees this subject.
The FCA says:
The Review will concentrate on how regulation can better support a healthy unsecured lending market.
It will take into account the impact of the coronavirus on employment security and credit scores, changes in business models and new developments in unsecured lending including the growth of unregulated products in retail and the workplace.
A year ago in UK credit records & scores – not fit for purpose! I detailed the many and varied problems with credit records.
These have now got worse as coronavirus payment breaks have not shown up as missed payments or defaults on credit records. That was the right decision:
- no-one wanted people to be put off taking the help they needed by worries about their credit scores;
- there is a good fairness argument that millions of people should not be penalised in future with lower credit scores because they were affected by the pandemic.
But a major side effect is to “mask” credit records, so when someone applies for new credit the lender can no longer easily see their payment history.
It is possible for lenders to find our what has happened if they look in detail or use other sources such as Open Banking, see Covid-19 – credit score protection, but will it be harder to get credit?
But this is a significant change for lenders. And consumers may think it is unfair if they are turned down for credit despite their credit score looking very good.
Many people might assume that the only sorts of lending that aren’t regulated are loans from friends and family or, well, loan sharks.
But over the last two years, new forms of lending have become increasingly common that are not regulated by the FCA in the same way as “normal” consumer credit such as loans, overdrafts, credit cards and catalogues.
Buy Now Pay Later (BNPL)
New lenders such as Klarna, Clearpay and Laybuy offer a way to buy goods now and pay for them later. They don’t charge interest to consumers and so sidestep regulation by the FCA. But as one banker told The Times:
Deferred payment is a debt and should be regulated as such.
These services make it very easy for someone to run up more debt than they intended to and more than they can manage.
This has always been a problem with regulated forms of BNPL such as store cards and catalogues A 2017 report Buy now, pay later: Problems with the point of sale credit market looked at how vulnerable customers can be particularly badly affected. The FCA took some measures to try to minimise these problems in 2019.
The new services are increasingly presented as the default way to buy online. This makes customers less likely to make a deliberate decision to buy on credit. And in some cases people are unaware they have even taken out this credit:
Salary advance schemes
Another form of unregulated credit is the workplace credit schemes such as Wagestream and Hastee, which are sometimes referred to as earned wage access or salary advances.
Loans from your employer do not fall under FCA regulation. But are these loans from your employer? The money comes not from the employer’s bank account, but from the scheme provider. And if they are loans from the employer, why are they not reported to HMRC in real time as such?
These schemes promise access to your own wages earlier, avoiding the need to take out expensive payday loans.
Many payday lenders have switched to 3 month or longer instalment loans to make them more affordable. Too often someone that borrowed £200 one month is unable to repay it in full the next months.
This “affordability” problem also applies to these salary advance schemes. If they have borrowed too much one month, their reduced wage packet then means they have to borrow again the next month.
So why should payday lenders have to make affordability checks and be regulated, when salary advance schemes don’t?
The FCA review is overdue
I think the new FCA review is very welcome, particularly the credit score and unregulated products aspects. Some forms of lending are regulated by the FCA and others at the moment are able to side-step this oversight even though they appear similar.
Too often the FCA is slow to react to new products. It needs to make sure that its scope and rules can adjust when new fintech firms come up with clever new forms of credit.