Consumer credit: A review of change and innovation in the unsecured credit market. Who does this affect and what does it mean?


On 2 February 2021, the FCA published a report (the report) on the findings of its review on change and innovation in the unsecured credit market led by the FCA’s former interim CEO Christopher Woolard. The review sought the views of a wide range of participants, both in the UK and internationally and three roundtables were held to discuss topics under review, information on the discussions at these roundtables can be found here.


The findings of the report will lead to further changes in the regulation of the consumer credit sector:

  • It proposes that Buy Now Pay Later (BNPL) firms currently exempt from regulation become regulated.
  • This is also relevant to retailers who offer customers these currently unregulated deferred payment options. Those who introduce third party credit usually have to be authorised themselves.
  • Regulated lenders providing unsecured credit should have regard to the proposals relating to forbearance, the role of and evolution of regulation for digital customer journeys, and an emphasis on whole product lifecycle outcomes-based regulation.
  • The importance of credit information and role of credit reference agencies is highlighted, with attention on what information is gathered, how it is analysed and how it is used to inform lending decisions.
  • Attention is given to the role of firms providing debt management advice and solutions and alternative sources of credit.

Next steps

The FCA and HMT will work together to draft suitable proposals for changes to legislation and regulation. Proposals for change will be subject to a formal public consultation, to take into account the views of consumers, providers and retailers in order to understand the impact regulation could have. More detail on the nature of proposed regulation is expected to be released in the FCA’s business plan to be published in April 2021.


The report talks about regulation as a catalyst for reshaping the credit market since 2014, and acknowledges that the market has also seen significant product innovation and exponential growth in the provision of unregulated credit facilitated through payments services technologies and open banking. It considers that this has not only brought benefits to consumers but also potential consumer harm. Consumer protection is the focus of and at the core of the recommendations made. The report also concentrates on challenges that coronavirus has presented for businesses and consumers and questions it has brought to the fore over affordability of credit, vulnerability of certain types of customers and the need for lenders to access to timely, comprehensive and holistic information to help better inform lending decisions.


The report makes 26 recommendations for the FCA to take forward, in conjunction with support from the Government and other bodies and are made with the aim of creating a healthy, sustainable and futureproof unsecured credit market.

These include:

1. Regulation of unregulated Buy-Now Pay-Later ("BNPL"): BNPL products are referred to in the report as those falling under the exemption at article 60F(2) of the Financial Services and Markets Act 2000 (regulated activities) Order 2001 (as amended) which requires credit to be repaid within 12 months of the agreement by no more than 12 repayments with no interest or other charges. According to the report this exemption was never intended for widespread use in the retail sector, having originally been created for invoice finance arrangements. The report also states that while BNPL credit has provided a useful alternative to payday loans and other forms of credit, it can also present significant potential for consumer harm, taking into account how consumers use and understand it, and should now be regulated in a proportionate way.

It acknowledges that non-financial organisations which use the same exemption for services such as healthcare or sports club memberships should not be brought into regulatory scope. It is recommended that the proposed framework should also address how credit information should be collected and used in the market, seek to ensure affordability is appropriately assessed, information about customers with multiple BNPL products appropriately reported and taken into account and address the treatment of consumers in financial difficulty.

2. Employer Salary Advance Schemes (ESAS): The report recognises that these offer a low cost alternative to high cost credit and can help employees. The report does not propose that these types of schemes should be regulated, but recognises that this is an area for ongoing monitoring to assess matters such as inappropriate relationships between employers and lenders, cross-selling of inappropriate financial services products and lack of visibility with credit reference agencies. It does recommend that this market should be monitored and that a code of best practice be drawn up for adoption by scheme providers and employers.

3. Digitalisation of customer journeys for credit: The report recognises that while smooth frictionless online journeys can benefit some customers they may inadvertently exclude or create problems for certain types of consumer, including the vulnerable. The report emphasises the importance of informed decision-making by consumers and recommends that the FCA puts in place guidance on digital design for consumer credit which focuses on good consumer outcomes and revises disclosure requirements to become more appropriate for the digital age. This responds to concerns raised by lenders and consumer representatives. In line with wider concerns about digital exclusion, the report also says that the FCA should ensure that the growth of digital doesn’t unduly exclude consumers.

4. Forbearance: The report acknowledges that affordability assessments and effective forbearance can help to reduce harm where consumers have difficulties in meeting repayments. It is recommended that the FCA, working with lenders and the credit reference agencies, should review and identify areas for improvement relating to how forbearance can be consistently applied and how this can be accurately reflected in credit information used for making lending decisions.

5. Credit Information: The report stresses the critical role of credit information in supporting the healthy operation of the credit market and suggests that the FCA should resume its market study to look at improvements to information quality, use of open banking data, mandatory reporting requirements, and the speed and sharing of information across the credit sector. It also states that the FCA should make clear the outcomes which the market needs to achieve for a healthy market for both consumers and lenders, including where consumers have contact with credit reference agencies and credit information services. A further matter raised is that the infrastructure for how credit information is submitted and shared should be reviewed and a plan put in place to update systems.

6. Consumer Credit regulation and outcomes-focussed reform: The report recommends that the FCA should set out clear outcomes which a healthy credit market should be achieving across all products and sectors, the priority being to consider the stages of the customer journey and life cycle of a product. It is suggested that to help with achieving this, the FCA and HMT should engage as a priority to commence work on reforming the Consumer Credit Act (CCA).

7. Alternatives to high-cost credit: The report recommends that the FCA should work with the Government and Bank of England to help reform the regulation of and lending capacity of credit unions and community development finance institutions and for more to be done to encourage mainstream lenders to provide alternatives to high cost credit. This includes work to look at increasing consumer awareness of alternatives to high cost credit and risks associated with illegal money lenders.

8. Debt advice and solutions: The economic effect of coronavirus will continue to drive the demand for debt advice. The report suggests that the FCA should work with the Money and Pension Service, government and other agencies to ensure there is access to free debt advice for consumers and secure long term and fair funding for the providers.

9. Relending: The FCA should conduct a review of relending setting out clear outcomes covering repeat lending and persistent debt across all products. It should explore if additional protections are needed on relending on fixed-term loans in view of findings in its high cost credit work.

10. Brexit: The FCA should conduct a review to identify what additional flexibility and simplification might be achieved following exit from the EU, for example in relation to consumer disclosures such as the Annual Percentage Rate (APR) and the potential value in pound and pence credit cost disclosures.

Actions for those potentially affected

While it may well take some time to effect the necessary legislative and regulatory changes required to bring the provision of unregulated BNPL credit within scope of regulation, it will be important for lenders and intermediaries to start engaging with how proposals will affect them and planning early for the transition into regulation. This could include understanding which business activities could fall within scope of regulation, and benchmarking/gap analysis of current processes and procedures with those required across the product lifecycle for providing regulated credit, from advertising, to lending and contract formation, to post-contract conduct. Retailers who are currently offering consumers unregulated BNPL credit do so without needing to be FCA authorised. Offering customers unregulated BNPL credit at checkout is currently relatively straightforward.

Once BNPL becomes regulated credit, retailers will need to consider if they want to continue offering consumers this type of regulated payment method and work with the credit providers to determine how they can continue to do so. Introducing consumers to regulated credit may require the retailer itself to become authorised, or act as an appointed representative of a regulated firm.

Regulated lenders who offer unregulated retail point of sale BNPL credit will want to be considering how they can best mitigate the impact of BNPL regulation on their retail introducers operating on an unregulated basis. Until the changes to legislation and regulation are finalised lenders might also want to be cognisant of the messages and recommendations contained in the report relating to forbearance, credit information and in relation to the digitalisation of their customer journeys in making business decisions.

Regulated lenders should monitor and engage with proposals to revise the regulatory and conduct framework that informs their activities, from credit decisions, to lifecycle processes and governance, and forbearance. Credit reference agencies should also pay attention to the scrutiny of their market and focus on the role, nature and quality of the information they consume and supply.

We can support clients with identifying product and operational changes triggered by the report’s proposals and assist with navigating the FCA requirements for applying for and being authorised.

For more information, please contact the authors.