Following extensive work in the consumer credit space, the Financial Conduct Authority (FCA) recently announced a review into unsecured lending, including Buy Now Pay Later (BNPL) products, with recommendations expected to be announced early next year.

The number of people using BNPL products has grown substantially in recent years, with more companies using them as a way to give increased flexibility to their customers. However, banks and other regulated lenders have highlighted that this type of borrowing does not appear in customer credit scores, making it harder for them to run accurate affordability assessments.

The FCA is also concerned that unsecured credit may result in more defaults, with an adverse impact on customers who are most vulnerable. For example, a lack of requirement for lenders to comply with responsible lending rules, such as affordability checks at the point of customer acquisition, may be allowing some customers to take out loans they cannot afford.

With the FCA considering whether to bring BNPL into the regulatory fold, this is an opportunity for credit firms to demonstrate responsibility, futureproof their lending practices and avoid further scrutiny.

What can we expect?

The review is being led by outgoing interim chief executive Christopher Woolard, whose regulatory experience includes the Bank of England, Ofcom and the BBC. To give the regulator confidence that they can act responsibly without closer supervision, unregulated lenders will need to demonstrate that they have taken on board previous guidance, evidence a proactive effort to improve standards and show willingness to work closely with their regulated colleagues on affordability checks.

For example, 2019’s High-cost credit review shone a spotlight onto the BNPL market, with the key finding that customers might experience harm due to the complexity of offers being made. As such, the FCA will be keen to see that this warning has been heeded by BNPL firms and that customer communication has been improved throughout the product lifecycle.

Moreover, consumer credit was a key priority in the FCA’s 2020/21 Business Plan, published under Woolard in April, with a particular focus on the impact of the COVID-19 pandemic on customers. The regulator has introduced a raft of measures in response to the economic disruption caused so far, to ensure that customers are receiving good and fair outcomes during a time of increased financial pressure.

In September, it confirmed the next stage of support for consumers using credit and overdraft products following its initial emergency response. This included greater expectations for firms to work together with their customers to identify sustainable repayment arrangements, which reflect individual circumstances. It also required lenders to make a wider range of short and long-term options available to more customers, as well as being able to better recognise and respond to vulnerable customers.

For lenders, this means mastering the balancing act between offering customers flexible repayment options, which could help them manage their cash-flow during the pandemic, and not pushing them to do so before they are ready.

Getting ahead of the regulator

To get on the front foot, firms can proactively review their existing internal policies and procedures in light of these expectations. Considerations include:

• Having adequate procedures in place for affordability assessments

• Being able to clearly evidence customer outcomes

• Providing clear information on charges and interest

• Having robust processes in place for the identification and treatment of vulnerable customers

• Providing tailored support and appropriate forbearance for customers facing financial difficulty

A well-trained, knowledgeable and empathetic customer service team is essential to the delivery of these priorities.

By actively setting a clear and consistent approach to both lending practices and customer service standards, BNPL firms will be able to demonstrate to the FCA that they are capable of supporting customers through the challenging economic times that lie ahead.