Beyond regulation: thinking creatively about consumer credit

Speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, delivered at the Responsible Finance Conference, Glasgow.

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Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: Responsible Finance Conference, Glasgow
Delivered on: 20 March 2018


  • Since taking over regulation of the credit sector in 2014, we’ve made huge progress in ensuring the market is fairer, cleaner and more sustainable.
  • Traditional regulatory interventions are only one part of the story. In order to enact real change, we also need to think creatively about the challenges this market throws up.
  • A key part of our approach is drawing on the abilities of others to influence demand in the market.
  • We support firms in developing innovative business models that answer genuine consumer need.

Note: this is the speech as drafted and may differ from the delivered version.

It is a privilege to be here today amongst people who continue to strive to do better for people using credit in Scotland and beyond.

I want to start my comments today by thinking about those very people.

There’s a danger, when you’re up to your neck in policy proposals, economic analysis and focus group findings, that you could forget that regulation of the credit sector is not a cold academic exercise.

Those of us engaged with this issue know the truth: that for millions of people credit is woven through the fabric of everyday life.

Here in Glasgow 41% of adults have outstanding, non-mortgage debt, with 11% of adults in particularly high-cost credit debt.

While across the UK as a whole, there are over 24 million people with debt on credit products.

For the millions of people behind these stats, credit represents very different things.

From a convenient means of collecting air miles on your daily spending to keeping your car on the road; from improving your house to needing to borrow to be able to cook the kids’ tea; from a sum that is easily repaid month on month to a constant worry.

The task of regulating an industry of this complexity can be a daunting one.

When the ramifications for ordinary people are so profound, how do we strike the balance between protection and access? Between demanding rigorous standards while leaving some space for original thinking?

It would - seemingly – be easy for us to simply reach for a regulatory stick, but the use of credit in many cases is fundamental to people’s lives, unavoidable even.

A market like this, where the consequences of our decisions are so acute, requires us to get under the skin of a series of complex problems and think creatively about the solutions we apply to them. They say necessity is the mother of invention, after all.

The people in this room are a vital part of this.

In order to be truly effective we also have to look beyond our own four walls, and beyond what might normally we expected of a regulator.

But in order to be truly effective we also have to look beyond our own four walls, and beyond what might normally we expected of a regulator.

Our approach has four components:

  1. We authorise, supervise and enforce against our existing rules
  2. We intervene and propose new rules where they are needed
  3. We work with others to address failure in the market and influence demand
  4. And we promote competition and innovation in the interests of consumers

I’d like to talk today about what this looks like in practice.

Putting things right

Regulating day-to-day is the most obvious thing people would expect the FCA to do.

As many in this room will be aware, our history in the credit sector began in 2014 when we took over the regulation of the industry from the Office of Fair Trading.

Since then we’ve worked hard to build up our knowledge of the sector and take action where it was most sorely needed.

A key part of this is ensuring that our existing rules are being upheld – this is the first quarter in the four-piece puzzle.

Areas like rent-to-own have fallen straight into this bracket.

We know that customers in this sector are amongst the most vulnerable, with a median annual income of around £16,000 in 2016, about £4,000 a year less than the typical individual income.

Evidence suggests people who use rent-to-own products have fewer options available to them. But, the impact of repayments, which can dwarf the cost of the item itself thanks to extra charges, is a concern, as is the degree to which consumers consider them when making a purchase.

And then there’s the way in which consumers are treated when engaging with this sector.

Our investigation into BrightHouse, the UK’s largest rent-to-own retailer, found that customers may have been treated unfairly, with processes falling short of our expectations. So, we took action, and the firm paid out over £14.8 million in redress to nearly 250,000 customers.

In fact, combined with the compensation paid out by Buy As You View due to poor practice, we’ve secured compensation for over 300,000 customers of rent-to-own firms who were engaged in poor practices – nearly £16 million worth in fact.

And that doesn’t include the package of redress of £2.1 million agreed by PerfectHome, which we announced today, made up of cash payments and balance write-offs for 37,000 customers.

Identifying and filling gaps in regulation

In total, we’ve secured £900 million worth of redress for consumers from firms across a number of sectors whose lending practices didn’t meet our standards – a not inconsiderable sum to have been collected in only four years.

It shouldn’t be a surprise that we are taking such action – it’s the bread and butter of our job. But that job is not only about enforcing our rules; it’s also about looking beyond existing regulation to identify any gaps. And we’ve already made some significant changes.

Only last month we announced new rules for credit card firms following our market study, in which we analysed the accounts of 34 million credit card customers.

These rules focus on persistent credit card debt. Debt of this type, when customers pay more in interest, fees and charges than they do of the actual amount borrowed, can have a corrosive impact. And by our estimates, 4 million accounts are affected.

Customers in persistent debt pay on average around £2.50 in interest and charges for every £1 that they repay of their borrowing – but are profitable for firms.

The new rules will tackle this head on.

When a customer has been in persistent debt over 18 months, their credit card provider will have to prompt them to change their repayment behaviour if they can afford to, and signpost them to debt help and advice if they need it.

If the customer remains in persistent debt after 36 months, the firm must offer them a way to repay the balance in a reasonable period. If that’s not possible for the customer, the firm must show forbearance. This may include reducing, waiving or cancelling any interest, fees or charges. 

We estimate that these changes will save consumers somewhere between £310 million and £1.3 billion a year in lower interest charges, while also reducing consumer stress and financial difficulties by resolving debt problems sooner.

The rules are designed to prompt firms and consumers to act before they reach the 36-month point and we will be watching carefully to see how they are implemented in practice.

This isn’t just about helping consumers in need, but changing the incentives for firms.

Another significant change we’ve made in the market is our regulation of high-cost short-term credit, commonly called pay day lending, including the price cap we introduced in 2015.

This has substantially reduced the cost of borrowing. In fact, our research shows that since the cap was introduced the amount consumers pay per loan has dropped from over £100 to £60, saving roughly £150 million for users of high-cost short-term credit every year.

We’ve taken great strides to ensure the market is fairer, cleaner and more sustainable.

We’ve taken great strides to ensure the market is fairer, cleaner and more sustainable.

But I am not naïve enough to suggest that everything in the garden is rosy.

For example, a startling finding to come out of our Financial Lives survey is that 4.1 million people are in financial difficulty in the UK. That’s 4.1 million people who have failed to meet credit commitments or pay domestic bills in three or more of the last six months.

Meanwhile, 50% of the UK adult population show signs of potential vulnerability. That’s over 25 million people who are at increased risk of financial harm, or would suffer disproportionately if harm occurred.

In Scotland, where we are today, that percentage rises to 54%.

Against this backdrop, we’re also still seeing aspects of the credit sector that concern us.

Take for example unarranged overdrafts, where we can observe disproportionately high fees and charges.

In fact, our research shows that there appears to be no clear relationship between the amount borrowed by the consumers and the amount charged by the firm.

Based on our early findings, we believe that there is a case to consider fundamental reform of unarranged overdrafts.

Before we reach final conclusions, we need to complete more analysis, for example to be sure that there aren’t any knock-on effects or unintended consequences of any action we might take. But the evidence gathered so far reinforces our concerns about this particular part of the market. And we won’t shy away from taking action if we deem it necessary.

Beyond regulation

So we’re taking action on behalf of consumers but we know there’s more work to do.

As I’ve just described, we see a case for intervention in a number of markets – and we are prepared to propose new rules where necessary.

But in order to be effective, we also have to accept that there is a limit to what can be achieved through traditional regulatory interventions.

Authorising, supervising, enforcing and writing new policy have their place, and we’ll not flinch from taking action against players who don’t meet our standards, including removing them from the market.

But classic regulation can’t provide all the answers. In order to have the greatest impact we also need to recognise the limitations of our powers. We need to draw on the abilities of others to drive change forward.

We need to draw on the abilities of others to drive change forward.

This is the third part of our approach – working with others to influence demand in the market – and high-cost credit is a clear example of how this can work.

For example, we know that consumers moving into social housing at short notice often turn to this sort of credit when their accommodation is unfurnished. Recognising this, some local authorities and social landlords have set up schemes to provide essential goods to tenants, with real success.

Yet, currently there is no formal mechanism for sharing expertise so that such schemes can be rolled out more widely. Some say a fear of our own regulatory requirements may also be acting as a disincentive for some social landlords.

It is in these sorts of areas, often overlooked or even unobserved in traditional discussions around the credit market, that we – as a collective - can make a real difference.

This is also a case study in why simply restricting access to credit is not the answer.

While we may be able to limit supply, restricting demand is a very different matter and this particular case is a visceral example of the vital role credit can play in someone’s life. At its simplest: how do you cook a meal and do your kids have a bed to sleep in?

So we have to look beyond the accepted boundaries and focus our efforts where they can make the biggest difference.

More broadly we have to look to the market itself and ask why more lower cost, lower risk options aren’t more widely available. What is standing in the way of greater competition and choice for consumers?

A customer with a good credit score might pay around £280 to borrow £4,000 for a year, while it could cost a riskier customer over £1,500. But where are the missing rungs on the ladder? What are the options for mid-cost credit?

The £22 million lent by responsible finance providers to over 55,000 individuals in 2016-17 is proof of the impact the sector is having.

But it’s still tiny compared to the scale of high-cost lending. Just look at high-cost home-collected credit and rent-to-own agreements where a total of £1.9 billion was lent in 2016.

Those statistics underline the challenge. Even if tomorrow, with the aid of a magic wand, we fixed every regulatory bump, information gap or co-ordination problem in the market, and we saw high-cost customers switch to mid-cost lending, the fact is that existing providers would be overwhelmed by demand.

So we have to look at business models and the supply of capital in this market.

I’ll say a bit more on models in a second. But capital is outside of our control. We welcome today’s announcements from Government and the alliance about potential dormant asset and philanthropic funding.

What we hope to see is more models emerge in this market that can provide commercially sustainable, mid-cost lending.

The economics of this do not operate in a vacuum, either. If you look at firms like Five Lamps, they couple lending with money advice – which is about long term outcomes, not just lending. Commercially, it means lower default rates.

Indeed, in the wider thinking and partnership needed here, we would see debt advice as an important part of the picture.

This is particularly true for vulnerable consumers who may find themselves shut out of financial services, without the access or resources many of us take for granted.

On this issue in particular we are seeing positive movement.

Peter Wyman’s recent report, which seeks more debt advice, more efficiently delivered across the mediums consumers most readily use, echoes our own ambitions for the sector.

The report also recognises something we have seen in our own work – that a piecemeal approach is doomed to failure.

In the debt advice space, the key is joined-up thinking: providers thinking fully about how consumers interact with them, and working together to tackle issues holistically. The same is true of regulation as a whole.

I want now to return to business models, and in particular innovation, as my fourth, and final, point.

Thinking out of the (sand) box by testing new products

The final component of our approach concerns innovation and its role in securing better outcomes for consumers.

Effective markets rely on competition: the ability of consumers to exercise choice, voting with their feet if they see that their needs can be better met elsewhere.

Our role at the FCA is to ensure consumers are empowered to make those choices and that innovation is free to play its part in driving value.

But we understand that firms have to be given space and support in order to innovate in the interests of consumers.

That’s why we created our regulatory sandbox, a safe spacefor firms to test new products – the first of its kind.

The sandbox is reducing the time and cost of getting innovative ideas to market: 90% of firms from the first cohort have gone on to market, with many firms finding it easier to access capital as a result of ‘playing’ in the sandbox.

And the products and services we’re seeing coming through are answering genuine consumer need.

Some of what we have seen really speaks to the challenges in this space.

Like the mobile app using behavioural economics to encourage consumers to set aside small amounts in a saving account – allowing them to repay high-cost credit obligations faster.

Or the platform that holds users’ current account, credit card and pension balances in one place, in a simple format – facilitating better financial management.

But many see this as a space where we are just interested in FinTech firms.

The truth is that it really is for all innovators, all cutting edge ideas. We have been really clear that if there are firms that want to test new ideas in the responsible or mid-cost finance space, we want to hear from you.


To conclude, be it though intervention or innovation, the FCA’s commitment to ensuring fair outcomes for users of consumer credit is absolute.

Our guiding principle is, and has always been, that markets must work for those who use them.

But to do that we have to think with imagination, working with and learning from others, breaking new ground and drawing on the technological opportunities of our time.

Much progress has already been made. But we still have work to do. We’ll roll up our sleeves and get stuck in where action is needed.

And with the support of partners, we can continue to shape a market that genuinely serves the millions of people who rely on it.