Outcomes Based Regulation
The Woolard Review, chaired by Christopher Woolard and conducted over a number of months from September 2020 to early 2021 reviewed change and innovation within the unsecured credit market, which includes credit and store cards, personal loans, overdrafts, and high-cost short-term credit. An advisory panel comprising firms and consumers from across a range of viewpoints supported the review, which has made a number of recommendations to the FCA. The FCA will now consider the findings of the report and decide whether to make new rules.
The Review offers a clear perspective on the effect of the coronavirus at this juncture, which provides the FCA with some recommendations for ensuring a sustainable market in the future. This perspective is supported by some of the findings in the FCA’s latest Financial Lives survey. An October 2020 survey found that the number of adults in the UK with characteristics of vulnerability was up 15% on the previous February, and is likely to have increased further since then. In addition, the number of consumers with low financial resilience – those who are in debt or have low savings or erratic earnings - increased by almost 4 million over the course of 2020.
The effects of the pandemic makes the FCA’s approach to the stability of the UK economy and the treatment of consumers all the more important, and the Woolard Review suggests some fundamental changes in approach may be on the cards to steady the financial sector in the future.
The Review highlights that the impact of Covid-19 on consumers has varied considerably, depending on their circumstances. In some cases, disposable income actually increased which has helped some to repay debt. Those earning less, however, have typically suffered greater losses on their earnings. This has, and will, change how individuals access and use credit.
Whilst the Review found that the FCA’s early actions – in setting out temporary guidance for consumer credit firms – protected consumers in the short term, it also suggests that extending a more prescriptive set of requirements around financial difficulties in the longer term might lead to better outcomes for consumers. In any case, the overarching requirement should be that forbearance options are tailored to individual consumer circumstances. In future, the Review suggests, the approach to forbearance should be prescriptive and consistent.
The Review expands on the potential for the use of outcomes-based regulation in the future. Given that the current regulatory approach – rules and principles – was implemented to avoid individual interpretation of best practice that may have contributed to the financial crisis in 2008, the Review highlights that outcomes-based regulation does not mean translating current rules to outcomes, which could run the risk of leaving how the outcome is achieved to the discretion of individual firms.
Instead, the Review suggests that more detailed and specific language than the current themes use, such as ‘reducing harm’ and ‘responsible lending’, should be used to guide future Regulation. In practice, this might mean that firms are provided with a clearer description of expectation or best practice that will give a direction for business policy and process. We have seen the FCA begin to move towards this approach in, for example, their Guidance for firms on the fair treatment of vulnerable customers. The Guidance doesn’t prescribe what firms should do, and it does not override other rules or principles within the Handbook, however, it does make clear what the FCA expects to see, and they can take divergences from the Guidance into account when making decisions. Broadly, the FCA hope the Guidance will lead to more consistent treatment of vulnerable customers, and that firm treatment of vulnerable customers meets each of the six consumer outcomes in ensuring that their needs are met through understanding their needs, taking action around the skills and capability of staff, and taking practical action through product design, customer service and communications.
Acknowledging the part that should be played by prescriptive rules in certain circumstances, the Review highlighted that while consumers of those products with specific sets of rules are better protected, over-focus on the creation of rules for specific products and circumstances could mean that consumers of different products are missed, leading to different outcomes for these people, although similar harms might exist. In short, a clearer focus on outcomes would aim for consistency, so that one type of credit doesn’t give advantages to customers that a different type would not.
One of the areas which might benefit is persistent lending – regardless of credit type – which would allow the FCA to keep track of specific interventions so that consumers get a similar level of protection across the board.
The Review also highlights an emphasis on affordability checks that has removed a focus from changes in circumstances that lead to financial difficulties – repayment difficulties that were not there when the customer initially purchased the product but have developed since – has meant that these customers can fall through the cracks. The Review suggests that the FCA should place a clear responsibility on firms to identify and reduce harm throughout the customer journey – not only at the start.
The Review shows how the financial sector’s regulatory regime needs to be able to adapt to change and absorb innovation. Also on the horizon are changes to the Consumer Credit Act 1974 and the FCA Handbook. The FCA will now consider the recommendations and is likely to move forward with many within 2021, meaning that a keen eye on upcoming news and publications is a must for at least the remainder of the year.