Financial Conduct Authority – The NEN

Millions of car finance customers to get payouts this year

FCA goes ahead with compensation scheme

Millions of motor finance customers will receive compensation this year under an FCA scheme for those treated unfairly by firms who broke the law by failing to disclose important information.

Consumers were denied the chance to seek a better deal and, in some instances, paid more for their loan.

The FCA has made several changes to the free to use scheme in response to conflicting feedback from consumers, their representatives, firms, manufacturers and industry bodies.

This ensures it is fair for consumers and proportionate for firms. The eligibility criteria have been tightened, average compensation increased for older agreements and a minimum 3% compensatory interest rate per annum added. Payouts will be capped in around 1 in 3 cases to ensure no one is put in a better position than had they been treated fairly.

12.1 million agreements made between 2007 and 2024 are now eligible for compensation, fewer than under the FCA’s original proposals. The average payout has increased to around £830 per agreement. The FCA estimates that 75% of eligible consumers will make a claim. If so, total redress paid would be £7.5bn.

Nikhil Rathi, chief executive of the FCA, said: ‘We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5 billion back into people’s pockets.

‘Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure.

“Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.’

An industry-wide scheme is the most efficient way of compensating affected consumers while supporting the ongoing availability of competitively priced motor finance for millions who rely on it. Without such a scheme, the cost to lenders of dealing with complaints through the Ombudsman or courts is estimated to be over £6bn higher.

How the scheme will work

Motor finance loans taken out between 6 April 2007 to 1 November 2024 are covered.

There will be a short implementation period so firms can prepare. This will be up to:

30 June 2026 for loans taken out from 1 April 2014.
31 August 2026 for those agreed earlier.

Lenders will have 3 months from the end of the implementation period to inform complainants whether they’re owed compensation and how much. This means that people who have already complained or who complain before the end of the relevant implementation period will be compensated sooner.

Lenders will only contact people who haven’t complained if they are likely to be owed money. They have 6 months from the end of the relevant implementation period to do so. This avoids unnecessary and potentially confusing communication with people who won’t get compensation. Anyone not contacted has until 31 August 2027 to make a claim.

Claims for high value loans – amounts higher than 99.5% of other loans that year – are not covered by the scheme, which is designed for the mass market. These consumers can still complain to firms and the Financial Ombudsman Service.

People will only be compensated if they were not told clearly that either:

Their dealer or broker set the interest rate to earn more commission (using a discretionary commission arrangement – DCA).
The commission was high – at least 39% of the total cost of credit and 10% of the loan.
The dealer or broker was using one lender or gave one lender the right of first refusal, (a so-called tied arrangement), except where lenders can evidence that there were visible links with a manufacturer and franchised dealer. For example, where they shared a common or similar name.

There will be some exceptions, with cases considered fair, if:

The commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date. Commission amounts below those levels are unlikely to have influenced the broker’s behaviour or consumer’s decision.
The borrower wasn’t charged interest.
The DCA wasn’t used to earn discretionary commission.
The lender can prove, in certain limited circumstances, it was fair not to disclose one of the arrangements above or that the consumer did not suffer any loss. For example, if no better deal was available.

Where the commission was very high (50% of the total cost of credit and 22.5% of the loan) and another relevant factor of unfairness existed, consumers will receive the commission paid.

For most people compensation will be made up of 2 parts, the average of:

The commission paid; and
The estimated loss, based on a percentage discount of the interest (APR) they paid – 17% for cases from April 2014 and 21% for earlier agreements, to reflect greater loss then.

Consumers should not be put back in a better position than they would have been had they been treated fairly or than those who suffered the most unfairness, so in around 1 in 3 cases, compensation will be capped.

Interest will be paid on compensation, based on the annual average Bank of England base rate per year plus 1%, at a minimum of 3% in any year.

The FCA has established a dedicated supervisory team, led by a Director, to monitor if firms are meeting the scheme’s rules and act if they’re not. If people disagree with their firm’s decision, the Financial Ombudsman will be able to assess whether the scheme rules have been followed.

The FCA has also joined with the Solicitors Regulation Authority, Information Commissioner’s Office and Advertising Standards Authority to launch a taskforce to tackle poor handling of motor finance claims by some claims management companies (CMCs) and law firms.

The taskforce is the latest measure by regulators to improve standards. The FCA has already removed or amended 800 misleading adverts, over 28,000 consumers have been able to exit contracts free of charge, and 3 CMCs reduced their high fees, protecting over 500,000 consumers.

Consumers can choose not to take part in the FCA’s compensation scheme and instead go to court, where they may get more or less compensation, based on the facts of their case. However, the outcome of a court claim is uncertain and accounting for legal fees they may pay, many consumers could end up with less. The FCA’s scheme is also likely to be faster and simpler.

Advice for motor finance customers

If you are concerned you were treated unfairly, make a complaint. People who complain before the relevant implementation period ends will be compensated sooner.
There is information on how to complain for free on the FCA website. There is no need to use a claims management company or law firm. If you do, you could lose over 30% of any money you get.
If you don’t complain and are owed money, your lender should contact you by end 2026 for post 1 April 2014 agreements and end February 2027 for agreements started between 6 April 2007 and 31 March 2014.
Watch out for scams. You can check you are dealing with your genuine lender using the contact details listed on the FCA website or through the FCA’s new motor finance scams helpline. You shouldn’t pay a fee to access compensation, or share sensitive details such as your PIN or online banking details.

Aidan Rushby, CEO and founder of car finance organisation Carmoola, said: “Millions of drivers could receive compensation after not being fully informed about how broker incentives affected the cost of their finance. The FCA has now confirmed a framework for putting that right.

“What matters now is whether drivers actually receive compensation quickly, clearly and without hassle.

“Redress must reflect genuine harm. But it must also be applied proportionately and consistently. Restoring confidence depends on delivering compensation clearly, consistently and as quickly as possible.

“Our research shows 73% of drivers say access to fair and affordable finance is crucial to owning a car, and 61% worry it could become harder to access. That balance is critical.

“We believe car finance should be simple to understand, transparent in how it works, and fair in how it treats people. Trust now has to be earned. That is a healthy shift for the market.”

Credit builder products: what you need to know

FINANCIAL CONDUCT AUTHORITY REVIEW PUBLISHED

The Financial Conduct Authority’s review of certain types of credit builder products found little evidence that they are effective for most consumers.

FCA want consumers to be able to make informed decisions so that they can navigate their financial lives.

That’s why we carried out work to understand how some credit builder products operate and have been working with firms and credit reference agencies (CRAs) to drive improvements in the market.

Here we explain the work we’ve done, and where consumers can access useful information on improving credit profiles, such as via MoneyHelperLink (external)

What we looked at

Credit builder products claim to help you build a record of making payments, which could improve your credit history and score.

Our review focused on specific credit builder products that simply report your regular payments to CRAs with the sole aim of helping you ‘build’ your credit score or history.

These products typically do not involve regulated credit. But because they are closely linked to the wider credit market and tend to be marketed to people who have little or no credit history, we looked at how they affect consumers.

We didn’t look at other products or features often described as credit builders like low-limit credit cards, rent reporting services, or services which simply explain how your credit file works.

Our key findings

Effectiveness: For most consumers, there is little evidence that these credit builder products significantly improve credit scores.
Potential risks: In some cases, firms reporting payments on these products to CRAs can potentially misrepresent a customer’s financial circumstances and help facilitate access to unaffordable credit. For consumers experiencing financial difficulty, these products are even less likely to positively affect credit scores and may reduce the amount of income available for essential living expenses.
Complexity and regulation: The majority of the credit builder products we looked at are unregulated and firms often fail to clearly explain their limitations and risks.

Our work

Based on our feedback, 5 firms have chosen to stop offering this type of credit builder product. Others have changed their products, business models and marketing materials.

We continue to work with firms offering these products as we decide whether we should take further action.

We’ve engaged with CRAs on new data reporting guidance to ensure that only appropriate information is reported that accurately reflects repayment performance.

What to consider as a consumer

There’s little proof that these products will help improve your credit score or make it easier to get affordable credit.

Think carefully about whether these products fit your needs and are worth the cost.

For more information on improving your credit profile, like tips on low-limit credit cards, or for free debt advice if you’re having money problems, visit:

MoneyHelperLink is external.

StepChange has welcomed the Financial Conduct Authority’s (FCA) review into credit builder products, and the harm that they can cause to consumers, particularly if they are struggling with debt.

Peter Tutton, Director of Policy, Research and Public Affairs at StepChange, said: “We welcome the FCA’s new review into credit builder products.

People who have a poor credit history or are new to credit may choose to use these products explicitly to build their credit score. Advertising of these types of products can exaggerate the benefits of having a good credit score, and lead consumers to believe it will help them get access to credit or other financial services.

“Our research finds people in financial difficulty delay seeking help because of worries about their credit scores – almost half (45%) of people finding it difficult to keep up with credit repayments were offered more credit. This increases harm and makes debt problems worse.

“The reality is that credit scores are only one element of what lenders look at when assessing credit worthiness. We support the FCA’s wider work as part of the Credit Information Market Study that lenders should report forbearance arrangements more positively which would make people more confident to get better and earlier help with their debts.

“We need to ensure the credit information system is not used to push people further into harmful debt.”

Cost of living crisis: Help is available for those who need it, says FCA

The Financial Conduct Authority (FCA) has reminded borrowers they can get help from their lenders if they are struggling to keep up with payments, as it found the number of people struggling to meet bills and credit repayments has risen by 3.1m since May 2022 (10.9m, compared to 7.8m in May 2022).

The number of adults who missed bills or loan payments in at least three of the last six months has also gone up by 1.4 million, from 4.2 million to 5.6 million over the same period.

The FCA has repeatedly reminded firms of the importance of supporting their customers and working with them to solve problems with payment, including by writing to industry bosses to make sure they are aware of the regulator’s expectations.

Where firms haven’t supported their customers properly, the FCA has told them to make changes. It reminded 3,500 lenders of how they should be supporting borrowers in financial difficulty and told 32 lenders to make changes to the way they treat customers. This work has led to £29 million in compensation being secured for over 80,000 customers.

As part of its Financial Lives survey, the FCA found that the cost of living is having an impact on people’s mental wellbeing. Around half of UK adults, or 28.4 million people, in January 2023 felt more anxious or stressed due to the rising cost of living than six months earlier.

Sheldon Mills, Executive Director of Consumers and Competition said: ‘Our research highlights the real impact the rising cost of living is having on people’s ability to keep up with their bills, although we are pleased to see that people have been accessing help and advice.

‘If you’re concerned about your finances, you do not need to worry alone. We’ve told lenders that they should provide support tailored to your needs. And, if you find yourself in debt or want to know more about how to manage your finances, free expert advice is available.

‘We will continue to act quickly to make sure financial firms help their customers who are facing financial difficulty or are worried they might be soon.’

The support needed to deal with the rising cost of living goes beyond what is provided by the financial services sector. As a result, the FCA continues to work with other regulators and debt organisations to drive better coordination and help make sure customers are treated fairly and supported if they get into financial difficulty.

The FCA will also be introducing the Consumer Duty in the summer. The Duty will be the driving force behind its consumer protection work, as it will require firms to act to deliver good outcomes for consumers and make sure that they are properly supported while using a financial product or service.

Research: Financial Lives January 2023: Consumer experience of the rising cost of living – the burden of bills and ways to get support

ARE YOU STRUGGLING TO COPE WITH DEBT?

Local advice is available at Granton Information Centre. Telephone 0131 551 2459, 0131 552 0458 or email appointments@gic.org.uk

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New powers to protect access to cash

Millions of people in communities across the UK will see their ability to access cash protected in new powers set out by the government today (Thursday 19th May).
For the first time, the UK’s largest banks and building societies will be subject to new Financial Conduct Authority powers to ensure the continued availability of withdrawal and deposit facilities in local communities across the UK.
Measures will be legislated for in the upcoming Financial Services and Markets Bill which will protect consumers and enhance the UK’s position as a global leader in financial services.

MILLIONS of people across the UK will benefit from new legislation to protect access to cash, helping to level up opportunity and ensure financial inclusion across the UK, the government announced today (Thursday 19 May).

Under the new rules, the financial regulator – the Financial Conduct Authority (FCA) – will be granted new powers over the UK’s largest banks and building societies, to ensure that cash withdrawal and deposit facilities are available in communities across the country.

The FCA’s new powers will allow it to address cash access issues at both a national and local level. To support the FCA, the government will in due course set out its expectations for a reasonable distance for people to travel when depositing and withdrawing cash. This will reflect the existing spread of cash withdrawal and deposit facilities in the UK.

Cash is the second most frequently used method of payment in the UK, and around 5.4 million adults rely on cash to a very great or great extent in their daily lives – further emphasising the importance of this legislation and new FCA powers.

Economic Secretary John Glen, who will be visiting Scotland today, said: “Millions of people across the UK still rely on cash, particularly those in vulnerable groups, and today we are delivering on our promise to ensure that access to cash is protected in communities across the country.

“I want to make sure that people are still able to use cash as part of their daily lives, and it’s crucial to ensure that no person nor community across the UK is left behind as we embrace a more digital world.”

The Chancellor set out in his Mansion House Speech in 2021 that the UK must remain at the forefront of innovation and technology, and the government recognises the need to embrace the transition to a more digital world and realise the opportunities this brings individuals and businesses.

But as we transition to a digital payments system, it is critical to acknowledge that cash access remains vital to millions of people in communities across the UK, particularly those in vulnerable groups, and no one should be left behind.

The government passed legislation to enable the widespread adoption of cashback without a purchase as part of the Financial Services Act 2021, which was possible as a result of the UK’s departure from the European Union.

And last month the government announced its intention to legislate to provide the Bank of England with the powers necessary to ensure the UK’s wholesale cash infrastructure – which includes the network of cash centres integral to the sorting, storing and distribution of notes and coin – remains effective, resilient, and sustainable, and continues to support access to cash across the UK.

Taken together, these measures will ensure that the UK’s cash infrastructure is viable for the long term.

These powers will be legislated for in the upcoming Financial Services and Markets Bill, which will protect consumers and enhance the UK’s position as a global leader in financial services.

One in three people struggling to keep up with bills and credit commitments – double the pre-pandemic number

Millions driven to harmful desperation borrowing as financial pressure on households deepens

The number of people finding it hard to keep up with bills and credit commitments has doubled since the start of the pandemic according to new research from StepChange Debt Charity.

The charity has found the proportion of people struggling is now nearly one in three (30%) GB adults – 15 million people – compared to 15% (7.5m people) who say they were struggling in March 2020.

The findings are part of a new report – Falling behind to keep up: the credit safety net and problem debt – which reveals the pandemic has further entrenched the use of consumer credit to make ends meet.

The report finds 8.6 million people in financial difficulty in Britain borrowed £26 billion to cover their basic needs in the last year. This includes 3.5 million people who have used credit to pay essential bills.

The number of people resorting to credit is expected to increase as the cost-of-living crisis pushes up the price of basic household essentials.

StepChange’s research reveals a credit market that does not always work for people in financial difficulty, with two-thirds (65%) of those in difficulty having kept up with credit repayments by missing bills, borrowing from family and friends or being forced to cut back to the point of hardship.

Despite rules designed to ensure those in financial difficulty access support, fewer than one in four of those struggling with credit repayments are in contact with their bank or credit firm.

Strikingly, half of GB adults (53%) say that they would be reluctant to seek help with financial difficulty from a bank or credit firm due to concerns about credit reporting and the anxiety and stigma of talking about financial difficulty.

The report finds that rather than access help, people struggling with debt can instead experience steps that make their situation worse. Among Stepchange clients who responded to an online survey, 26% were offered further credit after they were in financial difficulty, 35% had a payment taken they could not afford and 51% had interest added to a debt.

The lack of effective early intervention to identify and provide those in financial difficulty with a safe, fair way out of unaffordable debt is causing social harms, with 6.4 million struggling GB adults saying credit has had a negative impact on their health, relationships or ability to work in the last 12 months.

The research, based on a national survey of GB adults and an online survey of StepChange clients, highlights poor practice in the credit market such as ineffective affordability checks and automatic credit limit increases that draw financially vulnerable households into unmanageable debt.

With the cost-of-living crisis now further squeezing budgets StepChange is warning that many more people are likely to use credit to pay for essentials in the coming months. Urgent action is needed to support households to meet essential costs without resorting to credit.

The Financial Conduct Authority recently announced proposals to implement a new Consumer Duty that will require firms to focus on delivering good outcomes for consumers. StepChange is calling for the FCA to ensure the Duty changes practices that are failing consumers, including:

Raising standards of lending and addressing unaffordable credit limit increases so that fewer stretched households build unaffordable credit card debt
Requiring firms to intervene proactively and provide a widely available and safe offer to customers unable to keep up with repayments, building on learning from payment deferrals offered during the pandemic.

StepChange is also calling on the Government and the FCA to do more to provide alternatives to borrowing for households that are struggling to meet unexpected expenses, through grants via the social security system and a government-supported no interest loan scheme.

StepChange Chief Executive Phil Andrew said: “The sharp rise in the number of people struggling to meet their financial commitments should raise alarm bells across Government, banks and regulators.

“We are two years into a financially damaging pandemic and going through the sharpest cost of living increase in a generation. While consumer credit can potentially play some part in helping people navigate short-term pinch points, this must not be at the cost of their long-term financial and personal wellbeing.

“For our clients, a cost-of-living crisis is not new – for years we have been seeing a steady rise in the number of households who experience debt simply through a prolonged period of not having enough income to meet their basic needs.

“However, the number of such households looks set to grow, and in the absence of public policy intervention the risk is that such households will have no other option but to turn to borrowing in the short term, which will only exacerbate and prolong their financial difficulties.

“Those responsible for the steering us through these choppy financial waters need to be attuned to the harm many credit products, made available to people on the cusp of financial difficulty, can cause.

“The new Consumer Duty is a crucial opportunity for firms to redesign products and change practices to ensure credit does not exploit financial difficulty and those in difficulty get effective help fast.

“To resist acting is to risk a rapidly escalating debt crisis, particularly among lower income households.”

Falling-behind-to-keep-up-the-credit-safety-net-and-problem-debt-StepChange Download

Top tips for avoiding getting scammed out of your pension pot

It is estimated that more than 1.3 million people have been targeted by unscrupulous regulated and unregulated financial advisors who have pedalled bad advice.

These unscrupulous advisors have persuaded many people to transfer their existing private pensions or extremely valuable defined benefit pensions, to open a SIPP (Self Invested Personal Plan) and to “invest” in unregulated, high risk and illiquid “investments”.

Many people have lost most, if not all, of their pensions which they have been paying into all of their working lives. In some cases, people have transferred pension pots of £500,000 or more into worthless “investments” sold to them by dodgy or incompetent financial advisors who were not authorised or regulated by the Financial Conduct Authority (FCA).

Investments that promise significant returns but deliver losses have led to people losing most or all of their pension funds, leaving them devastated, often traumatised, unable to retire comfortably and often unable to retire at all.

Solicitor Paul Higgins of Pension Justice, a law firm that specialises in assisting victims of pension mis-selling to help recover some of their lost money, says: “That old adage of ‘if it sounds too good to be true, it probably is too good to be true’ couldn’t apply more than in the case of pension mis-selling.

“We’ve had clients that have been promised huge returns on unregulated investments into things such as storage pods, airport car parking spaces, fractional ownership of property in Cape Verde, carbon credits and more, which sadly have all turned out to be worthless”.

Pension Justice has helped its clients, who have been given bad advice, to recover millions of pounds in compensation and has the following top tips to help people from falling victim to pension mis-selling.

Knowing what red flags to look out for could save a person from making a terrible mistake that could help them avoid losing their pension and ruining their retirement:

1. Be suspicious of cold calls from financial advisors. As a general rule don’t take cold calls. If you don’t know who they are, put the phone down. If you are interested in talking to them, do some background research into their qualifications and the investments they are offering. Promises of doubling your money are probably worthless. Unfortunately, there are many unscrupulous “advisors” out there who prey on people by offering “free pension reviews”. Under no circumstances agree to anything on the phone or invite them into your home, however convincing, how friendly they are or how much pressure they put you under.

Check with the Financial Conduct Authority to see if they are authorised to provide financial advice.

2. Do your homework on the investments offered. Look up pension mis-selling, discuss the investment opportunity with friends and family and ask someone to help you do some research online if you are not internet savvy. Unregulated investments are highly risky, and you could lose your life savings for the baseless promise of high returns.

3. Make sure you understand the terms and conditions. Your financial adviser is in a position of trust and has to communicate the terms and conditions of any products they are selling. They need to ensure you are fully informed before making any decisions. If your pensions advisers don’t explain any terms and conditions, you will likely be able to file a claim.

4. Ask for a full breakdown of fees and charges. Make sure you find out exactly how much this transfer will cost you in terms of fees and annual charges. Again, victims of mis-selling sometimes end up paying out more money to the advisor than their pension earns. If the advisor is not clear about these fees and charges, then walk away.

5. You have been advised to transfer your pension from a workplace pension. It is doubtful that it will be beneficial for you to transfer your extremely valuable defined benefit pension and there is a good chance that you will be mis-sold.

Paul said: “If you think you have already been a victim of pension mis-selling, it is possible to get compensation. Pension Justice have recently helped one client recover compensation.

“She transferred £35,000 from a defined benefit NHS Superannuation Scheme of Scotland pension into a SIPP and thereafter “invested in an Ethical Forestry scheme” which failed.

“We recently helped another client who had a defined benefit scheme pension with Proctor and Gamble and also a personal pension which together were worth over £158,000. She was persuaded to open a SIPP and to transfer her pensions into that SIPP and thereafter invest over £149,000 in “investments” which subsequently failed.

“Pension Justice pursued a claim on her behalf to the FSCS (Financial Services Compensation Scheme) and in February 2020 recovered £85,000.00 in compensation for our client, the maximum payable under the scheme.”

FCA acts to protect insurance customers from loyalty penalties

The Financial Conduct Authority (FCA) has implemented a package of remedies to improve competition and protect home and motor insurance customers from loyalty penalties. This includes new rules so that renewal quotes for home and motor insurance consumers are not more expensive than they would be for new customers.

These measures address the issues identified in the FCA’s September 2020 market study, which found that millions of home and motor insurance customers lose out if they renew repeatedly with their current providers.

In 2018, 6 million loyal policy holders would have saved £1.2 billion had they paid the average price for their actual risk.

Many firms increase prices for existing customers each year at renewal – this is known as price walking. This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal.

It also distorts the way the market works for everyone. Many firms offer below-cost prices to attract new customers. They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more.

The FCA’s new rules will stop firms price walking. Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. It is likely that firms will no longer offer unsustainably low-priced deals to some customers. However, the FCA estimates that these measures will save consumers £4.2 billion over 10 years, by removing the loyalty penalty and making the market work better.

In addition to the new rules on pricing for home and motor insurance, the FCA is also bringing in new rules to:

give most consumers easier methods of cancelling the automatic renewal of their policy,
require insurance firms to do more to consider how they offer fair value to their customers, and
require home and motor insurance firms to report data to the FCA so that it can supervise the market more effectively

Sheldon Mills, Executive Director, Consumers and Competition at the FCA commented on the new rules: ‘These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider – but won’t be charged more at renewal just for being an existing customer.

‘We are making the insurance market work better for millions of people. We will be watching closely to see how the market develops in the future and to ensure firms continue to deliver fairer value to consumers.’

The pricing, auto-renewal and data reporting remedies come into effect on 1 January 2022. The rules on systems and controls, product governance and premium finance take effect from the end of September 2021.

Alongside today’s Policy Statement, the FCA has also published research on how incentives affect consumers’ choices, focusing on purchases of motor and home insurance made through price comparison websites. The research was undertaken to inform our approach to the new pricing rules.

The FCA will continue to monitor the market closely to ensure firms are ready to implement the pricing changes on time. The FCA will also review the effects of the remedies over the course of 2022, ahead of a full evaluation in early 2024.

Welcoming the announcement Gareth Shaw, Head of Money at Which?, said: “For far too long, insurance companies have employed sharp pricing tactics to lure in customers before hitting them with eye-watering price hikes and exorbitant premiums, so it is right that measures will finally be introduced to help put an end to these unfair practices.

“It is vital that the regulator keeps a close eye on insurance firms to ensure they don’t find new ways to exploit customers and should be ready to take further action where necessary.

“Greater transparency is still needed on what factors insurance firms are using to set prices and the FCA should carry out further work looking at whether there are other practices firms should be prohibited from using.”

Lords report: Over half of UK citizens ‘financially vulnerable’

The House of Lords Liaison Committee has published its third follow-up report; Tackling Financial Exclusion: A country that works for everyone?

This report examines the progress made by the Government in the implementation of the recommendations made by the Select Committee on Financial Exclusion in its 2017 report Tackling Financial Exclusion: A country that works for everyone?

In the Liaison Committee’s report Review of House of Lords Investigative and Scrutiny Committees: towards a new thematic committee structure published in July 2019, the Committee recommended that the Liaison Committee (on a case by case basis) could hold follow-up evidence sessions on a former special inquiry committee’s recommendations, followed by the publication of a report.

This is the third occasion on which this new procedure has been utilised.

The inquiry found that over half of the population are classed by the Financial Conduct Authority (FCA) as having characteristics of financial vulnerability.

This issue has been exacerbated by the COVID-19 pandemic with 14.2m people in the UK now estimated to have low financial resilience – characterised by over-indebtedness or with low levels of savings or low or erratic earnings.

Types of financial exclusion can include: not being able to open a bank account, not being able to access financial services due to bank branch and ATM closures, not being able to access affordable credit.

The report recommended that a clear Government strategy and increased FCA powers are brought forward in order to stop people experiencing financial exclusion.

The report calls on the Government to introduce a requirement for the FCA to establish a statutory Duty of Care that banks and other financial services providers must operate toward their customers. This should replace the current insufficient requirement to ‘treat customers fairly’.

Other recommendations in the Committee’s report, Tackling Financial Exclusion: A country that works for everyone? follow-up report are:

The proposed legislation to protect access to cash should be brought forward without delay.
The Government should publish the timescale and details on the no-interest loan pilot.
The powers of the FCA to mitigate the trends in bank branch and free ATM closures should be reviewed and enhanced.
The Government should continue to work with the Post Office and UK Finance to roll out a public information campaign about the banking services that the Post Office offers.

Baroness Tyler of Enfield, who was Chair of the Select Committee on Financial Exclusion, said: “It’s time for the financial services industry to recognise they have a fundamental duty to ensure that banks act in their customers’ best interests and that products and services are fair by design.

“That duty of care should now be established in law and overseen by the Financial Conduct Authority to ensure greater consumer protection and prevent banks and others from profiting from their customer’s vulnerability.

“The COVID crisis has laid bare the extent of financial exclusion across the UK. We continue have more than a million adults in the UK without access to a bank account and more than half the country now have characteristics of financial vulnerability.

“It is now more important than ever that Government come forward with a comprehensive financial inclusion strategy that will ensure access to cash, protect the public and end the scandal of the poorest being overcharged for financial and other services. The Government should publish that strategy within 12 months and allow Parliament to assess it and hold them to account for its delivery.”

Gareth Shaw, Which? Head of Money, said: “Millions of people rely on cash as they are not ready or able to take advantage of digital payments. However, rapid closures to the cash machine and bank branch networks in recent years mean that many of these consumers risk being abandoned by their banks.

“Our research has shown that people in some deprived areas have seen significant cuts to free ATMs in recent years, while a domino effect of bank branch closures has taken place without enough regard to whether suitable alternatives are in place.

“The government must urgently set out its vision for the future of cash, including its promised legislation to protect access to it. This should include putting the FCA in charge of the cash system so that it can take the steps that are needed to ensure cash remains a viable payment option for as long as it is needed.”

Buy Now, Pay Later schemes: financial regulator to intervene

The FCA has published a report on change and innovation in the unsecured consumer credit market following a Review by its former Interim Chief Executive, Christopher Woolard CBE.

Read the Woolard Review

The Woolard Review sets out how regulation can better support a healthy market for unsecured lending, taking into account the impact of the coronavirus (Covid-19) pandemic, changing business models and new developments in unregulated buy-now pay-later (BNPL) unsecured lending. The Review was commissioned by the FCA Board.

Christopher Woolard, Chair of the Review, said: ‘Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone. New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty.

‘Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic.

‘Alongside these urgent issues the Review sets out a series of recommendations for how the FCA, working with partners, can build a better market in future.’

UK households have nearly £250 billion of outstanding consumer credit debt and more than 42.5 million people used consumer credit in 2019.

The Review sets out 26 recommendations to the FCA, sometimes working with Government and other bodies, to make the unsecured credit market fit for the future, including:

The regulation of unregulated buy-now pay-later: BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the coronavirus pandemic. The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm. For example, more than one in ten customers of a major bank using BNPL were already in arrears. Regulation would protect people who use BNPL products and make the market sustainable.
Debt advice: The provision of debt advice will be critical to a sustainable market in the long term, especially through the recovery from coronavirus. Free debt advice services need secure, long-term funding as demand increases to as many as 1.5 million additional cases, following the pandemic. Funding needs to be in place to help the poorest pay fees when applying for debt relief orders.
Forbearance: The FCA responded quickly and effectively in the emergency phase of the pandemic – it needs to sustain this response through the recovery, for example by looking at whether it should revise its rules and guidance to drive greater consistency in the type of support firms offer consumers struggling to pay.
Alternatives to high-cost credit: A sustainable credit market needs more alternatives to high-cost credit. The FCA should work with the Government and Bank of England to reform the regulation of credit unions and Community Development Finance Institutions. More should be done to encourage mainstream lenders into this space.
Outcomes focused: Regulation should be driven by the outcome being sought and how consumers use products in the real world. Regulation should deliver similar protections where consumers face similar harms. In addition to making sure products are affordable, there should be an increased focus on lenders meeting consumers needs’ for as long as they hold the product. The FCA should review repeat lending.

The FCA welcomes the Woolard Review report into change and innovation in the unsecured credit market and supports the recommendations directed to the FCA. The Board agrees that there is a strong and pressing case to bring buy-now pay-later business into regulation.

Charles Randell has written to the Economic Secretary to the Treasury setting out the Board’s view and proposing that the FCA works with the Government to design the appropriate regulation.

Ensuring consumer credit markets work well is one of the FCA’s five priorities. The Board has asked the FCA executive to build the Review’s recommendations into its business planning. The FCA will publish its 2021/22 Business Plan in April, and will give further details of the response to the Review.

Charles Randell, Chair at the FCA, said: ‘Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses. While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households.

“Many people have been able to reduce their debts, but some of the poorest in our society have exhausted any savings or run up more debts. All the authorities which cover debt and debt advice must act together systematically to prevent problem debt and to help people get out of a spiral of debt through properly funded debt advice.

‘Regulation should be consistent and the Review shows how we can ensure high standards in consumer credit regardless of the form of credit.

‘The Review has powerful recommendations on debt advice and insolvency including on the IVA market. We are ready to work with other regulators to reduce the harm that IVAs can produce for people that use them, and to reduce the scope for unscrupulous operators to prey on vulnerable indebted people through for-profit debt packaging.

‘As the market innovates and changes, regulators and legislators need to respond quickly and decisively to protect consumers by facilitating credit where it is beneficial and clamping down on it when it does harm. The FCA agrees that there is a strong and pressing case to bring buy-now pay-later business into regulation.’

Buy now, Regret later?

Which? is calling for Buy Now, Pay Later firms like Klarna and Clearpay to be fully regulated to provide greater protection for consumers, as new research from the consumer champion finds concerning industry practices encourage people to spend more than they planned to.

The consumer champion’s findings show that these slickly designed, easy-to-access credit products are encouraging impulse buying, with nearly a quarter of BNPL users (24%) saying they spent more than they planned to because BNPL was available.

With one in ten (11%) BNPL users reporting that they have incurred late charges when paying this way, Which? is concerned about the dangers involved with this growing form of unsecured credit, particularly when the risks are not always made clear, and is calling for the financial regulator to be given new powers to fully regulate the BNPL industry to prevent consumers from being harmed.

The research suggests pushy marketing strategies, combined with sales features that make payment easier – such as ‘express checkout’ services on some retailers’ websites – could be driving people to overspend and leading to people falling into debt, a concern also shared by debt charities such as StepChange.

Which? also found that a quarter of BNPL users (26%) said they had not planned to use this type of payment option until it popped up at checkout, while two in ten (18%) said they used BNPL because they were offered a discount to do so.

One in ten (13%) also said they used it by accident because it was selected as the default payment option at checkout. One survey respondent said: “I was tricked into [using] it because the box was already ticked”.

BNPL firms also advertise heavily on their partners’ websites. Which? looked at 80 of these sites and found the largest BNPL ads take up as much as 80 per cent of the screen, with fashion retailers most likely to carry these prominent ads.

These factors are evidence of the firms’ application of consumer psychology to drive sales, a strategy one BNPL provider has promoted to its retail partners.

In 2017, Klarna, one of the leading BNPL firms in the UK, commissioned a study with the University of Reading into online shopping behaviour. The report, intended for partner retailers, explains how to design ‘customer journeys’ that will persuade people to make ‘emotional’ purchases instead of ‘logical’ ones.

However, as Which? research shows, these frictionless customer journeys can lead to shoppers spending more than they can afford, without necessarily being aware of the risks.

41 per cent of people in the Which? survey who were aware of BNPL either did not believe or did not know that missing a payment could lead to the BNPL firm passing your debt on to a debt collection agency.

As a result of its findings, Which? is now calling for providers of this type of BNPL service to be regulated by the Financial Conduct Authority.

In its submission to the regulator, the consumer champion said that, while supportive of innovation, it believes that the BNPL market must have consumer protections in place in line with other regulated unsecured credit products.

Giving the FCA the powers to regulate the BNPL market would allow it to more effectively monitor how BNPL firms treat consumers, and if necessary, take action to prevent consumers from being harmed.

Jenny Ross, Which? Money Editor, said: “While Buy Now, Pay Later services offer speed and convenience at the checkout, our research shows their design makes it far too simple for shoppers to spend more than they were intending.

“This could lead to people building up debts that they may struggle to pay back, which is particularly concerning if they don’t understand the risks of using this type of product.

“Given that many people’s finances are stretched now more than ever, we believe that the FCA needs to regulate this market to ensure consumers are not harmed and that action can be taken if these firms are treating customers unfairly.”

A spokesperson for Klarna responded: “While we cannot speak for the sector as a whole, it is wholly incorrect to claim that Klarna uses ‘pushy marketing strategies’. All Klarna customers are provided with our terms and conditions, which clearly outline the potential consequences of non-payment.

“If a customer misses a payment, we will proactively contact them to remind them via text, email, in-app notifications and letters. Klarna will only refer unpaid debts to a debt collection agency as a last resort after a period of several months.

“Klarna is fully engaged with the FCA review of the unsecured credit market.”