FCA unsecured credit review: Is the regulator coming for Klarna and co?

At the annual meeting today (September 24), held digitally, the FCA’s board discussed and answered questions on a range of topics, covering its own reforms, online ad scams, overdrafts and most notably, its review of the unsecured consumer credit market including regulatory scope for this sector.

When questioned on the review, which will be led by the FCA’s outgoing interim chief executive Chris Woolard, Woolard said he’ll be looking at buy now pay later deals and loan products linked to salaries – both of which lay outside the watchdog’s perimeters.

Woolard explained that the FCA had seen “an extensive shift to these products” which remain outside the regulator’s jurisdiction because they fall within exemptions to a law that’s old “and was intended to deal with other things.”

The FCA also dealt with the question about the collapse and exit of payday lenders in recent years, due to more intense regulatory activity, and whether the review might open up a new approach, and if the disappearance of high-cost credit providers could leave customers with little choice but to turn to illegal money lenders.

The regulator was asked: ’Surely, the FCA should have worked with the lenders with the financial backing and power to rectify their mistakes, rather than leave customers more vulnerable, by having these lenders exit?’

Woolard added: “Clearly we have seen a lot of regulatory activity in this market. There was significant misconduct that needed to be rectified. We’ve also seen a range of findings by the financial ombudsman that relate to the misconduct part of that equation.

"So, there have been big pressures on this part of the industry. There’s often a proposition offered that, if many of those lenders exit the market, what we’ll see is unregulated lending among backstreet operations, and illegal money lending. On the whole, we don’t see huge evidence of that happening, despite that contraction, and we work very closely with Trading Standards and the illegal money lending team.

"What we do see in other parts of the market is innovation. This is largely in the retail space outside our perimeters. Part of the reason for the review is to take stock of that market and see how it’s developing.

"At the heart of this, is the question around if there’s a sustainable and compliant business model, when you rectify those problems and remove those harms to consumers. Are those businesses capable of staying in the market? In many cases, the answer was no."

Jonathan Davidson, director of supervision - retail and authorisations at the FCA, said: "The absolute priority for us is affordability. The biggest damage to consumers, particularly vulnerable consumers, comes from irresponsible, or even predatory lending, where there’s a business model that’s highly profitable when customers can’t afford to repay.

"The issue that’s paramount on my mind is the phenomenon of an individual’s affordability test on an application for a loan, being shown as ’affordable’, but then that consumer taking a whole chain of those loans which starts to indicate that the loan is unaffordable, because the consumer has to keep taking it out."

On whether the unsecured credit review will open up a lighter approach to payday lenders, Davidson said: “In the meantime, there will be no lightening up of our approach to ensure lending is affordable in this space."