On 2 February 2021, the Financial Conduct Authority (FCA) published the much-anticipated Woolard Review, a significant and wide-ranging review of change and innovation in the unsecured credit market. The report contains 26 recommendations for the FCA, government and other bodies, including an urgent recommendation to bring all buy now pay later (BNPL) products into the remit of FCA regulation. Walker Morris consumer credit expert Jeanette Burgess summarises the report and offers her practical insights.
The FCA Board commissioned the FCA's former Interim Chief Executive Christopher Woolard to undertake the review in September 2020, supported by an advisory panel. The review focused on how regulation can better support a healthy unsecured lending market. It took into account the impact of the Covid-19 pandemic 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. The terms of reference are set out in Annex 1 of the report.
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 amendments to legislation are made to bring BNPL products within the scope of regulation (the government has already confirmed in correspondence that it agrees with the recommendation and that legislation will be brought forward as soon as parliamentary time allows).
- The FCA must without delay coordinate with the UK government, devolved administrations and insolvency regulators to ensure that suitable debt solutions are available to best serve people in financial difficulties. This should include identifying quick actions to remove or reduce barriers to accessing suitable solutions (including fees) and steps to reduce consumers being driven towards unsuitable solutions (including the role that marketing plays in this).
- 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 the ‘masking' of credit files.
The FCA has accepted the review's recommendations and will build them into its business planning. Further details will be given when the next Business Plan is published in April 2021.
BNPL products and the Article 60F(2) exemption
While it is recognised that unregulated BNPL products can be a useful tool for managing personal finances, identified potential harms include: poor consumer understanding of the product; insufficient protection for vulnerable consumers; lack of proper affordability assessments; lack of visibility of BNPL liabilities for other lenders; and the potential to create high levels of indebtedness.
The review is concerned with BNPL products that are currently outside the FCA's perimeter, i.e. unregulated BNPL credit agreements which rely on the exemption found in Article 60F(2) of the Regulated Activities Order. As the report explains, these agreements often take the form of either deferred payment or short instalment loans. Before responsibility for consumer credit was transferred to the FCA, the exemption was previously under the Consumer Credit Act 1974 (CCA). It was limited to 4 payments within 12 months, but was increased to 12 payments on transfer to the FCA. The report says that the CCA exemption was never intended for this kind of product but only for short-term invoice deferral.
The report recognises that BNPL providers are not the only firms that rely on the Article 60F(2) exemption, noting that it is also used by a variety of non-financial firms offering interest free credit, for example dentists for repayment plans and sports clubs for membership fees. In recommendation number 18, the report says that in defining the regulatory framework for BNPL, the FCA and Treasury should take care not to include other non-financial organisations that rely on the current exemption, including healthcare services and sport clubs. The government has also said 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.
There is no mention of the insurance sector, which relies on the exemption in a similar way to enable policyholders to spread their annual premium payment across monthly instalments through the year.
What does this mean for firms relying on the exemption?
It is clear from the report and correspondence between Christopher Woolard and the government that it is unregulated BNPL activity in the retail sector which is causing the concern, fuelled by the rapid rise of e-commerce during the pandemic (among other factors). The exemption was intended for short-term payment deferral and not for the kind of widespread use currently seen in the retail sector.
In terms of next steps, the government will 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 report says that once the FCA has the necessary powers it will need to develop a proportionate regulatory framework, including addressing how credit information should work within the market.
Consideration will also need to be given to the regulatory treatment of partner retailers. Once exempt BNPL agreements are brought within the regulatory perimeter, the retailer will need to be authorised for credit broking. Given the wide range of retailers in the market, the regime will need to be proportionate; becoming an Appointed Representative for credit broking is an alternative to having to seek direct authorisation for such firms.
While the push for reform is clearly centred on bringing all BNPL products into regulation, it would seem very likely that scrutiny of the exemption and all its current uses will form part of that discussion. Careful and precise drafting will be required to achieve the intended aims for BNPL regulation without precluding the effective use of the exemption seen in many other sectors or creating legislative loopholes. Any firm which currently operates in reliance on the Article 60F(2) exemption should watch out for and scrutinise the consultation and may wish to respond, depending on how the way in which the proposals are ultimately framed affects their business.
Other key recommendations
Other key recommendations include:
- encouraging the growth of alternatives to high cost credit
- building a better credit information market
- ensuring guidance is in place for digital design in the consumer credit sector that focuses on good consumer outcomes, so that consumers are informed and remain in control of their decision-making
- taking an outcome-based approach to regulating the credit market, setting out clearly what the market should be achieving at each stage of the consumer journey and lifecycle of a product and how regulation can support that
- conducting a review of relending.
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