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Last November, the Chancellor of the Exchequer, Rachel Reeves, told City bankers at her Mansion House speech that regulatory changes following the Global Financial Crisis had “gone too far” and that “it is important that we learn the lessons of the past.” As she put it, “the UK has been regulating for risk, but not regulating for growth.”
A month later fifty economists and policy experts told her [1] deregulation could threaten financial stability and jeopardise her mission of growth and competitiveness in the financial sector.
‘Regulating for growth’ is a catchy slogan, but even if we were to accept the Chancellor’s starting point, there is a risk that the pendulum may swing too far in the other direction. As the Chair of the Financial Conduct Authority ('FCA'), Ashley Alder, said at the end of last year, there are “clear dangers” of a global “race to the bottom”.
A recent joint FCA and Financial Ombudsman Service (‘FOS’) call for input concerning ‘mass redress events’ has highlighted the problems that result from too little regulation, not too much. ‘Mass redress event’ is the term being used to describe large volumes of successful consumer complaints.
Recent years have seen several of these, including for the ‘mis-selling’ [2] of Payment Protection Insurance ('PPI') and because of the high-cost credit sector’s failure to lend responsibly.
Large volumes of upheld complaints about consumer credit lenders indicate widespread problems with lending practice, and - by extension– a failure to prevent poor practices at an earlier stage.
Lack of clear rules and regulatory inaction
Mass complaints arise because of a lack of clear rules. The PPI scandal – which eventually led to £38 billion worth of compensation pay outs- is a case in point. The scandal took place under a ‘principles-based’ regulatory framework. Firms were required by the regulator to “treat customers fairly”. They didn’t, and regulatory inaction meant it subsequently took mass complaints over several years for customers to get paid their compensation.
Similar failings arose with respect to irresponsible lending practices in the high-cost credit sector. Despite years of warnings from consumer agencies and campaigns; multiple investigations, the restrictions on ‘rollovers’ and cost of credit cap in 2014/15, and several FCA approved redress schemes, it wasn’t until October 2018 that the FCA told lenders to take ‘prompt action’ to assess the compliance of their creditworthiness assessments and “consider whether pro-active redress” was required to compensate customers,
This was too little, too late. Payday lenders collapsed under the weight of their liabilities for ‘mis-sold’ loans, and, with these in administration, borrowers only obtained pay-outs for pitiful amounts. Borrowers received less than 6% of the compensation owed to them by WageDay Advance, and 4.3% of the compensation owed by Wonga.
The travesty of (de-)regulatory sludge
Buy Now Pay Later (‘BNPL’) is now the latest example of a misguided belief in policymaking circles that poorly regulated credit is somehow ‘good’ for growth. They likely know that weaker regulation will cause consumer harm but are nevertheless prepared to trade this off for the sake of their wider – in our view illusory - growth agenda.
Put on notice by Ministers in February 2021, BNPL providers have managed to dodge the regulatory perimeter for more than 4 years and counting. This is despite the growing problems reported by debt advice agencies like StepChange and Citizens Advice. Official concerns were also reported by the FCA’s ‘Woolard Review’, which highlighted the lack of affordability checks and poor treatment of customers in arrears. Whilst there is a wealth of evidence that BNPL has created harmful debt problems, our policymaking process has failed to get to grips with it; held back by (de-)regulatory sludge.
Our response to the recent call for input highlights similar concerns about the subprime credit card sector, focusing on the ‘credit building’ card business NewDay. Our review of FOS decisions concerning their lending practices has found multiple examples of the company breaching affordability rules. These include:
- Increasing a customer’s credit limit multiple times despite the customer being in ‘persistent debt’ (decision)
- Approving four separate credit increases for a customer known to be in arrears with other lenders and on household bills (decision)
- Increasing the credit limit of a customer five times until the amount was £5,600 and completely unaffordable (decision)
- Approving two separate credit cards for a customer in difficulty due to a gambling addiction, having fallen into arrears on rent and Council Tax (decision).
There is a need for the FCA’s supervision and enforcement activities to be guided by Ombudsman decisions such as these. Patterns in FOS decisions need to be identified at an early stage and swift action taken against firms to prevent poor practices escalating into mass complaints.
But they also reveal a need for the rules to be clearer. In the cases relating to NewDay the decisions rely on the Ombudsman interpreting what constitutes “proportionate” and “reasonable” creditworthiness assessments. When assessing affordability, borrowers are also supposed to be able - after accounting for the cost of servicing their debts - to support a “basic quality of life”. These vague terms leave lenders too much discretion in their lending practices.
The level of doubt about these terms has, in the past, led to lenders developing exploitative practices. During the country’s current affordability crisis, it is creating nervousness amongst firms who might otherwise, in a clearer environment, have been prepared to lend responsibly to people on low incomes. It’s certainly hampering investment in the sector, which is now seen as too risky because of the possibility of mass complaints.
The solution is not to make it harder for people to make complaints about poor practices: for example by limiting their time to do so, or by shooting the messenger of claims management companies. Rather, the evidence of the past two decades is that both regulatory go-slow and imprecision are the main problems. Indeed, firms have often quietly, behind the scenes, called for more detailed rules to provide them with more certainty when developing business models and products.
There is now a clear risk that the FCA’s move to an ‘outcomes-focused’ regulatory framework – as indicated by the recent Consumer Duty - will combine with Government’s drive for growth through de-regulation and lead to large-scale consumer harm.
We agree with the Chancellor about the need to learn the lessons of the past. But these point to better regulation, not de-regulation, as the key to 'growth without consumer exploitation'.
Notes
[1] CfRC was one of the signatories to this joint statement, which is available in full here.
[2] The term ‘mis-selling’ is a misnomer, PPI was a product designed and sold with the deliberate intent of exploiting consumers.
