Supporting consumers through tough times – priorities for credit regulation

Speaker: Brian Corr, Interim Director of Retail Lending
Location: Credit Summit 2022, QEII Centre, London
Delivered on: 23 March 2022
Note: this is the speech as drafted and may differ from the delivered version

Highlights

• Consumers are facing increasing financial pressure – credit matters greatly for consumers and can help them to cope, but also has significant potential for harm
• We’re focusing closely on delivering the right outcomes for consumers who use credit products, and we want firms to do the same – the new Consumer Duty will play a big part in this
• Ensuring that borrowers get the right help and support from their providers when they get into financial difficulty remains a key priority, as it’s likely more people will need it
• We’re also looking at how to help people with limited borrowing options, without reducing protection from unaffordable lending and other types of harm 

Given that you and your firms represent a large proportion of the consumer credit market, this is a particularly timely moment for us to engage. It’s vital that we maintain constructive dialogue between regulators, industry, consumer groups and debt advisors, as the economic situation changes around us. Those changes will be having significant effects on firms across consumer credit, and a real impact on consumers, with much more change to come.

People across the country are facing significant pressure from the rising cost of living. We’re still processing the effects of previous seismic events like Brexit and the coronavirus pandemic, as the implications of the war in Ukraine start to impact the UK economy. Just as we and the credit industry acted swiftly and successfully to help shield consumers in the emergency phase of the pandemic, we need to respond again to these new circumstances – and be ready for future challenges when they come. 

For us, that means continuing to sharpen our focus on the outcomes consumers get from credit markets, underpinned by our more adaptive, more assertive, and more innovative regulatory approach. 

Today, I’ll talk about the outcomes we want to see from consumer credit and what we’re doing to help deliver those; how we’re adapting our approach in the new economic environment; and how we want to work with you and your colleagues to be ready to help people through the challenges ahead. 

Rising pressure on consumers

Over the last few months, a steady stream of headlines, statistics and warnings have set out ever greater financial pressure on consumers. The cost of living hit a 30-year high[2] in February, with inflation running at 6.2% and outpacing wage growth. Electricity bills[3] were up nearly 20% in the year to January 2022, and gas bills by 28%, with further rises expected even before the Russian invasion of Ukraine. Private rental prices[4] across the UK went up by 2% in the year to January, the highest rate for five years; in the East Midlands that figure was 3.6%. Interest rates rose from 0.25% to 0.5% last month and to 0.75% this month. National Insurance goes up next month, costing the average worker £250 a year[5].  

In October last year, about a third of people surveyed by YouGov thought their financial situation would get worse over the next year; by January this year, more than half did. About 25% of the UK population have low levels of financial resilience, and while that number has been largely stable since the beginning of 2020, it may well change in the coming months. Low levels of resilience and rising costs are a potent combination that could cause serious financial problems for millions of people – and that could have significant implications across the credit sector.

Credit markets that support consumers

We understand that more borrowers are getting into difficulty, more needing help from their lenders and more seeking debt solutions. We expect to see higher demand for credit, but the rising cost of providing and obtaining credit is likely to make it less affordable for some. People who want to borrow or have already done so will in many cases find it harder to pay off their debts. 

To help consumers through this, we need credit markets that are innovative, competitive, and focused closely on delivering the right outcomes for the consumers they serve. Credit matters greatly for consumers – allowing them to manage their money and helping them to cope in tough times. It also brings significant potential for harm – so firms need to be cautious and diligent, focused on their customers’ needs, and ready to respond as those needs change. We want firms to make the same shift as we are - focusing ever more closely on delivering the right outcomes for their customers.

Focusing on the right outcomes – the new Consumer Duty

That’s the key driver for the new Consumer Duty[6], a regulatory tool built to allow us and firms to be more adaptive – the outcomes we want to achieve stay the same but we can be more flexible as to how we achieve them, adapting quickly to changing circumstances like the wider economic problems we now face. The Duty allows us to look at consumers as they really behave and makes firms work to deliver good consumer outcomes, not just narrow or technical compliance. Firms that get this right should then see the rewards in the marketplace.

We’ve now consulted twice on our proposals and expect to have a policy statement and any new rules in place by the end of July, only four months from now. We will continue to work with industry and will provide firms with more guidance and help as the Duty comes into force. But this is not going to be an exhaustive list of what you can and can’t do – the Duty is intended to be flexible to allow us and you to respond to circumstances. That means you don’t need to wait for us to give detailed rules – you can get a head-start now by making sure you have the right mindset, culture and data in place, and looking for gaps between where you are now and where you’ll need to be.

Above all, that means making sure you understand your customers and how they’re affected by the products and services you provide. This will address a key driver of harm that we’ve seen in the sector previously – firms losing touch with how consumers use their products. So are you giving them products that suit their needs – for example, if your products are designed for short term borrowing but customers are using them for long-term borrowing, is that leading to persistent debt as we saw previously with catalogue, credit and store cards? Are you giving them clear and transparent information so they can properly assess what you’re selling, and not – for example - pushing them towards some credit options by making them much more prominent or making others harder to find? Are you responsive, accessible and helpful to your customers when they need you, or are you causing them additional stress, taking up too much of their time, or failing to properly consider complaints?

We want firms to have confident and positive answers to all these questions – so if you haven’t already, you should start thinking now about how to do that across the products you have and any new products you are designing.

We are not waiting for the Duty to come in before we act to improve consumer outcomes. For example, we have consulted on banning debt packagers from accepting referral fees for passing customers on to other providers of debt solutions, because of the conflict of interest between giving consumers advice in their best interests, and the financial incentive to make certain recommendations. We’re also working more closely with other bodies like the Insolvency Service to deliver joined-up solutions to wider problems. On buy-now-pay-later, whilst Government intends to give us the power to regulate these products, we’ve used the powers we already have to scrutinise the firms’ contracts and continue to work with them to secure improved contract terms and refunds for consumers.

Helping borrowers in financial difficulty

A specific outcome that we’re maintaining our emphasis on, given the wider economic situation, is ensuring that borrowers get the right help from their providers when they get into financial difficulty. We want firms to recognise the characteristics of vulnerability and respond to customers’ particular needs, as well as providing forbearance and support in general. 

This builds on the success of the work we did with firms and consumer organisations to respond to the pandemic, and going back further.  For example, we’ve been monitoring the effects of our rules on persistent credit card debt, which required firms to do more to help customers. Our work and industry’s response have led to a significant drop in the numbers of customers entering persistent debt – paying more in interest, fees and charges than they are repaying of their borrowing. By last November, more than half of persistent debt customers – nearly 600,000 people – looked set to pay down their debt faster than if they had stuck to minimum contractual repayments.

We’re now running a comprehensive programme on how borrowers in financial difficulty are treated so that we can ensure those who need help are getting it. This covers lending products across and beyond consumer credit, including firm surveys, in-depth discussions with firms and consumer research. We appreciate the demands that this puts on firms, responding to data and survey requests and engaging with my colleagues on what they’re seeing. But it’s vital that we continue to work with you to help borrowers get the right support, as it’s likely more and more people will need it. We are thinking carefully about the implications of the rises in the cost of living and increasing pressure on consumers as we take this project forward.

In January, we set out our progress and some of the key things we’ve found so far. That included some positive findings from the firm surveys we’ve conducted – for example, nearly 80% of firms offering support and forbearance to customers who are up to date with repayments but worried they will fall behind. It’s also good to see, given our emphasis on consumer outcomes, that end-to-end outcome testing as part of quality assurance is embedded at large firms and spreading to others. Where we’ve identified firms at risk of falling below the standards required, we are engaging with them directly, and formal action remains an option where appropriate.

We’ll issue a full report setting out our findings as early as possible in the second half of 2022. In the meantime, the temporary support guidance remains in place and sets out clearly what we expect from firms. Please do keep talking to us about what you’re doing and what you’re seeing in the market, especially as the implications of the wider economic circumstances affect your customers – and use our January update as a prompt for thinking about what else you might need to do to support them.

Helping people who can’t access credit

There are some people whose financial situation makes it difficult or impossible to use credit and debt to get to good outcomes – borrowing is either not a viable solution or their fragile circumstances make using credit risky. In the past, many have been able to borrow using high-cost credit products, but that hasn’t necessarily worked to their advantage. We’re thinking carefully about how to help those who have historically been limited to high-cost credit options following recent changes in the market.

We have been assertive in improving high-cost credit markets for those who use them. We’ve secured around £1bn in redress and debt write-offs for consumers; we’ve brought in price caps and rules on a range of products that have saved consumers hundreds of millions; and we’ve driven up standards and driven out numerous poor practices. People who use high-cost credit products now are much less likely to suffer harm as a result. The changes we’ve made are necessary to protect these consumers, who are often in vulnerable circumstances, even if that means that fewer firms can meet the standards required to offer high-cost loans - and fewer people can access them.

There is a lot less capacity to lend in the market now than there was a few years ago, and our analysis suggests that there will be limited supply of credit in future to consumers at the highest risk end of the market. That is in large part because there has been far too much unaffordable lending, causing direct and significant harm to borrowers. This is borne out by the proportion of complaints about unaffordable lending that the Financial Ombudsman Service[7] (FOS) has upheld – still greater than 60% – and the redress liabilities that firms have built up. 

We have seen nothing to indicate that FOS’ approach to assessing affordability complaints, including loans involving relending, is out of line with our expectations. Our own experience is that firms have too often failed to meet our expectations on affordability, including relending. We see no case for lowering these standards – we won’t help consumers one bit by making it easier for firms to lend them money that they can’t pay back.

So, how can we support this group of consumers without reducing necessary protections and exposing them to further harm? We’ve been talking to firms, investors and consumers about what the future looks like for people with limited borrowing options. We do see a continued role for a commercial sector here, addressing some of the gap between people who can use mainstream lenders and those for whom borrowing isn’t appropriate. Where consumers can afford to use high-cost credit and it can work for them in the ways it’s meant to – allowing people who can’t borrow elsewhere to manage short-term cashflow problems, in a way they can afford – they should be able to access it. To support firms, we are considering how we can help them better understand our expectations and how to apply our rules in practice so they can be compliant and sustainable.

But there are many people who need ways to manage short-term income shortfalls, and a compliant, responsible commercial high-cost credit sector can only meet some of this demand. We, with Government and others, need to keep thinking across our remits and regulatory boundaries about what other support we can give people. We are supporting Government and Fair4All Finance[8] on initiatives like the no-interest loans scheme[9], and are ready to play our part in collective efforts to do more. And we continue to work in partnership with the UK’s Illegal Money Lending[10] teams to share intelligence and take action against those undertaking unauthorised activity.

We’re also looking at what we can do to encourage new and innovative solutions, and keeping an open mind on how developments in other markets affect these consumers. For example, we’re looking closely at whether and how they have been affected by the significant growth of the buy-now-pay-later sector and what might happen when that sector is subject to credit regulation. While we recognise that these products can cause harm, having access to an interest-free credit option can also offer real benefits for those who repay on time.

Giving consumers the outcomes they need

The economic situation we find ourselves in means that it’s never been more important for consumers to get the outcomes that they need from consumer credit markets – helping them to cope with turbulence and find their way back to stability. Our approach to regulation is to zero in ever more closely on delivering those outcomes, and we want firms to do the same – understanding who your customers are, what they want from you, and how you’re delivering it for them. By aligning the goals that regulator and industry are working towards in this way, we can ensure that consumer credit markets provide people with the help and support they need in these difficult times.