On 2 February 2021, the FCA published a report on change and innovation in the unsecured consumer credit market following a review by its former Interim Chief Executive, Christopher Woolard. The review sets out how regulation can better support a healthy market for unsecured lending, taking into account the impact of the COVID-19 pandemic, changing business models and new developments in unregulated buy-now pay-later (BNPL) unsecured lending. The Review was commissioned by the FCA Board.

The report sets out certain recommendations including:

• The regulation of unregulated BNPL: BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the COVID-19 pandemic.
• Debt advice: The provision of debt advice will be critical to a sustainable market in the long term, especially through the recovery from the COVID-19 pandemic. Free debt advice services need secure, long-term funding as demand increases to as many as 1.5 million additional cases, following the pandemic. Funding needs to be in place to help the poorest pay fees when applying for debt relief orders.
• Forbearance: The FCA responded quickly and effectively in the emergency phase of the pandemic – 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.
• Alternatives to high-cost credit: A sustainable credit market needs more alternatives 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 be done to encourage mainstream lenders into this space.
• Outcomes focused: 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.

The FCA Board agrees that there is a strong and pressing case to bring buy-now pay-later business into regulation.

Charles Randell has written to the Economic Secretary to the Treasury setting out the FCA Board’s view and proposing that the FCA works with the Government to design the appropriate regulation.

The Government has issued a response to the report agreeing that HM Treasury should legislate to bring unregulated BNPL activity within scope of FCA regulation. The Government notes that:

• Given that unregulated BNPL products are interest-free, they are inherently lower-risk than many other forms of credit and they can also be a useful tool for managing personal finances and smoothing out the cost of bigger purchases. Regulation of BNPL products should therefore be balanced to ensure it provides consumers with the protections to counter the potential detriment the report identifies, but without damaging their fundamental utility in the process.
• It is important that regulating BNPL does not unintentionally bring other low-risk, day-to-day business activities that use the existing exemption for short-term payment deferral, such as gym membership and sport season ticket providers, into regulation. To achieve this balance and to ensure regulation is effective, it is right to take into account the views of consumers, providers and retailers through a formal consultation process in order to understand the impacts that this regulation could have.

The Government states that it is working with the FCA to assess the policy and legislative options to achieve a balanced and proportionate approach to regulation and it intends to take forward the necessary legislation as a matter of priority.

In this short video blog, retail specialist, Matthew Gregory, looks at the content of the publications and what this means for businesses in this space.