Conor D’Arcy, Head of Research and Policy, Money and Mental Health.
Today the Financial Conduct Authority (FCA) has published the Woolard Review into the unsecured credit market, which includes credit cards, overdrafts and payday loans. The standout finding from the Review is the welcome call to regulate ‘buy now, pay later’ (BNPL) products, and the government’s commitment to take action. But the Review also picks out a number of other areas where customers – including those with mental health problems – could be better supported and protected.
The most eye-catching element of the Review – which our chief executive Helen Undy was on the advisory board for – is its recommendations on BNPL. These products can be a useful way to smooth our spending. But concerns about affordability, consumer understanding and their massive growth had led to calls, including from us, for regulation. As our recent report on online retail discussed, the ability to pay nothing or just a fraction of the price upfront often incentivised people to spend more, and sometimes more than they could afford. The statistic cited in the Review, that more than one in ten customers of a major bank using BNPL were already in arrears, only heightens these fears.
In our research, we heard how common symptoms of mental health problems could make it even harder to resist the impulse to shop with BNPL and made it more difficult to understand the terms, conditions and repayment timeline.
But the Review also acknowledges that while the way unsecured credit is promoted and sold can cause problems for consumers, its use can also be a symptom of financial difficulty. The Review recommends that the FCA provide the government with evidence on how the demand for high-cost credit is affected by wider social policy. It particularly notes Universal Credit and how the five-week wait for a first payment can leave many of those affected with few options but to borrow at painfully high rates of interest. Improved analysis of this kind is always valuable, but the key test will be what the government does in response.
Alongside this, the Review sets out steps to boost affordable lending to people who would benefit from but currently struggle to access credit. It argues for a loosening of restrictions on credit unions and encouraging mainstream lenders to offer more products aimed at those on lower incomes. Again, this is a welcome idea but it remains to be seen if it will lead to significant enough and – crucially, given the pressure the pandemic is putting on household finances – fast enough action. In our submission to the Review, we suggested that, if expanded, the government’s pilot of no-interest loans could quickly fill an important gap in the market for those struggling financially.
More generally on the pandemic, the Review rightly praises the FCA’s quick response in spring 2020, introducing a raft of measures like payment holidays and other types of forbearance. The coming months present an excellent opportunity to evaluate how well that has served customers and whether that benefit has been felt equally. The Review’s call for the FCA to review its overall approach to forbearance is therefore a sensible one.
Another trend that is likely to have been sped up by the pandemic is online borrowing. Members of our Research Community told us how online transactions – including credit applications – that have limited ‘friction’ can play upon symptoms of mental health problems. The Review’s emphasis on the design of these journeys and in particular on the importance of ensuring vulnerable customers “are able to remain in control of their decision-making” is particularly welcome.
As a backdrop to these efforts on better lending, the Review recognises how crucial free debt advice can be and underlines the urgency of a joined-up response from the FCA, governments across the UK and funders and regulators of debt advice. Our research has found that, while often transformative, free debt advice could sometimes prove hard to access for people with mental health problems. With nearly half of those in problem debt also experiencing a mental health problem, it’s vital that efforts to ramp up debt advice ensure it is accessible to everyone.
The Woolard Review has shone a light on some concerning trends at a critical time, and made helpful recommendations in response. And it’s welcome that the government has committed to acting quickly on BNPL. But as with any review, what really matters is what happens next. We look forward to working with the FCA, government and firms to ensure that these markets work well for all consumers, including those with mental health problems.
