Consultation responses

This section contains the Centre’s responses to major consultations issued by the Government and regulators.

HM Treasury consultation on buy now, pay later (BNPL)

Financial Inclusion Centre has submitted a response to HM Treasury’s consultation on the regulation of buy now, pay later (BNPL) products. We very much welcome the Government’s decision to regulate BNPL and the determination to act quickly.

Our submission can be found here: HMT BNPL Condoc FIC submission 1124 final

As a non-profit organisation which focuses on financially vulnerable consumers and those poorly served by financial services, we have been concerned that these consumers have been left for too long without meaningful consumer protection when using BNPL.

Access to fair, affordable, and sustainable credit that is socially useful and enhances consumer welfare is a critical element of financial inclusion and resilience. We emphasise social utility and enhancing consumer welfare as genuine financial inclusion is more than just about the numbers of consumers potentially having access to credit, or with credit. The fact that consumers can have easy access to certain forms of credit – or, more accurately, can be targeted with certain forms of credit as retail finance is supply side driven not demand led – is not necessarily welfare enhancing. Payday lending was a case in point.

Unregulated or poorly regulated consumer credit can create overconsumption of credit which can undermine consumers’ propensity to save and build financial resilience. If it is too easy to borrow, it can make it hard to save. Overconsumption of credit can result in overindebtedness, leave consumers financially struggling, and exacerbate existing financial vulnerabilities. FCA research has found that adults with characteristics of vulnerability were more likely to report using BNPL, and that 44% of the
most frequent users of BNPL were over-indebted. 1

BNPL is a form of  ‘embedded finance’. Embedded finance exploits the fact that the focus of the consumer is on obtaining the necessary or desired goods and services, not on the utility of the credit which facilitates access to those goods and services. BNPL providers have been very successful at removing any transactional friction that can cause consumers to consider carefully the decisions and choices they make.

It can also have negative impacts on consumer focused competition. It allows well-resourced commercial for-profit credit providers operating to lower regulatory standards to crowd out non-profit community lenders such as credit unions and CDFIs who may be better placed to offer more appropriate credit.

However, we are concerned that the regulation will only cover third party providers of BNPL. We argue the new regime should apply to BNPL generally not limited to third-party lenders. Increasingly, there is a blurring of the lines between finance and technology, and finance, technology, and retail consumer markets (‘embedded finance’ – see above). Yet, the intersection between these markets is poorly regulated. Including only third-party lenders would create an obvious risk that big tech or e-commerce platforms would move into this market and exploit the fact that they did not have to operate to the same standards as regulated providers.

We also argue that, given the risks with embedded finance, the FCA will have to find a way to inject some ‘friction’ into the customer journey to prompt consumers to think carefully about using BNPL before committing to the transaction.

1 Research Note: Deferred Payment Credit

Financial Conduct Authority (FCA) Call for Input on streamlining rules following the introduction of the Consumer Duty initiative

The main financial regulator, the Financial Conduct Authority (FCA), is reviewing its Handbook of rules and guidance following the introduction of the flagship Consumer Duty initiative. The FCA invited comments on issues including:
• which detailed rules or guidance could be simplified to rely on high-level rules, or
have interactions with other rules which could be clarified
• how any steps to simplify the rules and guidance affect its statutory objectives
• the appropriate balance between high-level and more detailed rules
• the potential benefits and costs from simplifying the rules

Financial Inclusion Centre supports efforts to restructure the FCA Handbook and streamline rules that produce no benefits for consumers and business, as long as consumer protection standards are maintained. But, we are very concerned about the potential risks with this initiative especially as it is happening at the same time as the Advice/ Guidance Boundary and Consumer Credit Act reviews.

Financial services lobby groups are using ‘Trojan Horse’ arguments that current consumer protection standards stifle financial innovation and competition, hinder financial inclusion, and hold back the competitiveness and growth of the UK financial sector and wider economy.

There is no evidence that current consumer protection standards have these effects. Yet, Government and financial regulators appear sympathetic to industry arguments. Government is pressuring the FCA to do more to support the growth and competitiveness of the UK financial sector.[1] The FCA uses unfortunate phrases such as ‘regulatory burden on business’,[2] which implies the FCA has already decided there is too much regulation even before the Call for Input or other reviews are completed. We are concerned the FCA will come under further pressure during this review to reduce consumer protection standards. We hope the regulator resists this pressure.

[1] Reeves to tell UK financial watchdog to prove it will support growth

[2] Financial regulator seeks to reduce burdens on firms and support growth | FCA

FIC response to this Call for Input can be found here: FCA Streamlining Rules FIC submission October 2024 Final

Financial Conduct Authority (FCA), The Value for Money Framework CP24/16

The Financial Inclusion Centre has submitted a response to the Financial Conduct Authority (FCA) consultation CP24/16, The Value for Money Framework which has just closed. The summary of our response and full submission can be found here:  FCA consultation on a pensions Value for Money Framework

The overall intention is to enable better scrutiny of value for money in workplace pensions which come under the FCA’s remit. There is a similar initiative for pension schemes which come under The Pensions Regulator (TPR).

Pension arrangements will assessed using this new VFM framework and rated red, amber, or green (RAG). We fully support the intention to ensure people saving for a pension get the best value for money possible. But, we have some serious reservations about the FCA’s approach. The proposed framework could encourage competition on spurious grounds. It threatens to reverse the progress made on reducing investment management costs and as a result risks reducing pension values.

HM Treasury and Financial Conduct Authority Discussion Paper DP23/5  Advice Guidance Boundary Review

The Financial Inclusion Centre has submitted a response to the discussion paper produced by HM Treasury (HMT) and the Financial Conduct Authority (FCA) on the Advice Guidance Boundary Review. Our submission can be found here: HM Treasury/ Financial Conduct Authority DP23/5 Advice Guidance Boundary Review

ESG ratings – DRWG voluntary Code of Conduct consultation

HM Treasury Future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers

The Financial Inclusion Centre submitted a response to this important consultation on the regulatory regime for ESG ratings providers. We very much welcome the government’s intention to give the FCA powers to regulate ESG ratings providers. However, we do have concerns about elements of the government’s proposed approach. It is critical that the underlying data on the ESG performance of economic entities (corporate and sovereign) is also regulated or else ratings systems will be ‘built on sand’. We also raised concerns about the FCA’s approach to developing an interim voluntary code of conduct on ESG ratings intended to be used until the FCA has the powers to regulate ESG ratings.  The working group tasked with developing the voluntary code of conduct will be almost entirely dominated by industry representatives. This will not inspire trust and confidence in any code that emerges.

The submission can be found here: ESG ratings providers consultation

FCA Discussion Paper DP23/1 Finance for positive sustainable change: governance, incentives, and competence in regulated firms

The Financial Inclusion Centre submitted a response to this important Discussion Paper. The submission can be found here: FCA DP23 1 finance for sustainable change FIC submission final

As we argue in our major policy report The Devil is the policy detail – will financial regulation support a move to a net zero financial system? | The Financial Inclusion Centre the current approach to financial regulation will not be sufficient to align financial market behaviours with environmental and social goals. The UK financial sector continues to finance, at scale, economic activities which harm ‘people and the planet’. Financial institutions which do so are not being held to account.

The main issue on the environmental side is that protecting the environment from finance is not given anywhere near the same status in regulation as other objectives such as protecting consumers, maintaining financial stability, market integrity, preventing money laundering or the financing of terrorism. We argue that financial regulators should be given a primary statutory objective in relation to climate change underpinned by a comprehensive robust set of policies to change the behaviours of financial institutions.

On the social impact side, much stricter criteria on the definition of social impact or social sustainability are urgently needed to prevent social impact washing. Preventing social impact washing | The Financial Inclusion Centre

There is a significant amount of work needed to align financial markets with environmental and social goals. Addressing governance, incentives, and competence in regulated firms could play an important role. But, it is very important that the FCA and other regulators do not rely on a market led approach or try to incentivise change. Regulatory interventions aimed at encouraging positive behaviours and cultural change do not have a good track record in other areas of financial markets. There is little reason to expect that this approach will be that effective in realigning financial market behaviours with respect to environmental and social goals. Disclosure aimed at exposing adverse behaviours and practices along with tough regulatory interventions will be needed to constrain market practices that continue to cause environmental and social harm.

HM Treasury Consultation Reforming the Consumer Credit Act 1974

The Financial Inclusion Centre has made a submission to this important consultation on the reform of the Consumer Credit Act 1974. FIC very much supports the government’s overall aim to update the system of legislation and regulation relating to consumer credit. We agree with the general thrust of the government’s approach to move, where appropriate, core elements of consumer protection from legislation to regulation. We agree that regulation can be more flexible and agile than legislation. The Consumer Duty, if robustly supervised and enforced with enhanced regulatory transparency, could be very effective.[1]

However, there are some very important specific aspects of the consumer protection regime which should be left in legislation either because those aspects are not possible to replicate in regulation or the deterrence effect supplied by the threat of legal action.

Moreover, while the government recognises the need to make legislation and regulation more agile and responsive post Brexit, it does not appear to be proposing any significant changes in the general approach to enable regulators to take the initiative in response to financial ‘innovations’ which create risks for consumers. Our submission can be found here: Reforming the Consumer Credit Act 1974 – HM Treasury Consultation

[1] See: FCA consultation on a new Consumer Duty | The Financial Inclusion Centre

Financial Conduct Authority consultation on Sustainability Disclosure Requirements (SDR) and Investment Labels CP22/20

The Financial Inclusion Centre has submitted its response to the Financial Conduct Authority’s important consultation on Sustainability Disclosure Requirements (SDR) and Investment Labels CP22/20.

Robust regulatory interventions are needed if we are to move to a net zero financial system. Protecting the environment from harmful financial activities needs to be given at least equal status in the regulatory system as protecting consumers, preventing money laundering and financing of terrorism, and maintaining market integrity and financial stability.

The FCA’s initiative for green labels to help investors make informed decisions could have made a useful contribution to that effort. But, this is a missed opportunity. We think the FCA’s proposals are confused, too narrow in scope, would allow the investment industry too much leeway to ‘mark its own homework’ on compliance with green goals, are unlikely to stop greenwashing (or impact washing), and won’t hold financial institutions that continue to finance climate damaging activities to account.

Our submission can be found here: Financial Conduct Authority consultation on Sustainability Disclosure Requirements (SDR) and Investment Labels CP22/20

 

FCA Discussion Paper DP21-4 Sustainability Disclosure Requirements (SDR) and Investment Labels

Financial Inclusion Centre response to the FCA’s Discussion Paper DP21-4 on Sustainability Disclosure Requirements (SDR) and Investment Labels. We supported some of the FCA’s initial proposals. But, we are concerned the classification system proposed is not robust, could result in confusion, and lead to greenwashing, misselling, misrepresentation, and investors inadvertently making poor financial decisions. There is a lack of detail on how the FCA will supervise compliance with its rules and how claims made by financial institutions are to be independently audited to ensure that any label or rating system is not built on misleading foundations. For more detail, and to download the submission please see here: FCA Discussion Paper DP21-4 Sustainability Disclosure Requirements and Investment Labels

FCA consultation on a new Consumer Duty

The FCA is introducing a new consumer duty that would set clearer and higher expectations for financial firms’ standards of care towards consumers. Before doing so, it consulted in its proposals. Financial Inclusion Centre very much supported the principle of, and the intent behind, the new Consumer Duty. In theory, a powerful, properly implemented Consumer Duty could help enhance consumer protection, promote real competition, and help improve confidence and trust in the financial services industry. But, the ambition for the Consumer Duty is too limited. The FCA needs to step up its efforts to make markets work by adopting a precautionary approach to regulation, using product regulation, and tough sanctions to deter bad behaviours. The FCA is unclear on how it would deal with emerging risks at the intersection between FCA regulated financial services and non-regulated digital and data services and ‘Big Tech’ platforms. More clarity is also needed on how the Consumer Duty would apply when regulated firms use products and services outside the regulatory ‘perimeter’. Moreover, the new proposals are very weak on how firms are meant to report compliance with the Consumer Duty or, indeed, how the FCA will report to Parliament and the public on how well the Consumer Duty is changing market behaviours.  For more detail, and to download the submission please see here: FCA consultation on a new Consumer Duty

FCA High Cost Credit Review

The Financial Inclusion Centre responded to two important consultation papers which formed part of the FCA’s High Cost Credit Review. These covered overdrafts (CP18/13) and rent-to-own, home collected credit (doorstep lending), catalogue credit and store cards, and alternatives to high-cost credit (CP18/12). On overdrafts, the FCA made some helpful proposals. But, the overall package of measures does not go far enough to protect the most vulnerable overdraft users including those with protected characteristics. The main criticism relates to the continuted reluctance of the FCA to use price caps to protect consumers from high charges. We also argued for the introduction of financial inclusion legislation similar to the US Community Reinvestment Act (CRA) and Homeowners Mortgage Disclosure Act (HMDA) including greater transparency on how well individual financial institutions perform against financial inclusion metrics. We very much supported many of the proposals in CP18/12 aimed at improving the information provided to consumers in these markets. But, considering the overall package we are not convinced that these measures go far enough. The FCA seems to see its role in being a referee, or creating a level playing field, between consumers and suppliers in the market rather than making the market work. Regulators are best placed to make this market work – not consumers. For more detail, and to download the submission please see here: FCA High Cost Credit Review

Work and Pensions Committee Inquiry into Pensions Freedom and Choice

The Centre has submitted its response to the Work and Pensions Committee Inquiry into ‘Freedom and Choice’. We are concerned that the risks associated with freedom and choice have not been fully appreciated. At the time of the launch we warned that the reforms were a regressive policy, rushed and very poorly planned, and badly implemented.

Consumers might welcome the reforms – after all who can be against ‘freedom and choice’. But there is cognitive dissonance evident here. Consumers also want their pensions to be safe and reliable. However, consumers will be exposed to greater uncertainty and risks in the form of market, product, misselling and fraud, and longevity risks. In addition, the reforms are likely to push up the costs of providing financial advice, push up costs of saving for retirement and/ or reduce the value of pensions in retirement.

Savers now have a good value, collective option for accumulating retirement savings in the form of NEST. But, this will now be undermined by the additional costs introduced at the decumulation phase as a result of freedom and choice. Costs are particularly important for the groups of pension savers we focus on – underserved, lower-medium income households.

Sadly, some of our fears have already been borne out particularly with regard to scams. But the real damage will be done in the medium-longer term as the costs of saving for retirement are pushed up and consumers are exposed to greater market uncertainty and longevity risk. It is simple logic that when more costs are extracted from the pensions system this reduces the value of retirement savings meaning households have to save more to compensate.

There were, of course, problems with the old system and annuities rightly came in for some criticism. But, the old system did allow consumers to manage longevity risks. It is not progress to replace a system with some faults with a new system which exposes consumers to greater market, misselling/ scam, and longevity risks and ultimately pushes up the costs of saving for retirement.

Lower-medium income households who can afford to save comparatively low amounts are particularly affected by high costs. They are also disproportionately affected by poor advice and decision making – they cannot absorb the financial losses associated with market and misselling risks in the same way as better off households.

Freedom and choice threatens to reverse the very real progress made through automatic enrolment and NEST. If we think of AE/ NEST filling the pool of retirement savings[1], freedom and choice drains away those savings in the form of consumers drawing down savings and/ or the pensions and investment industry extracting value in the form of high costs.

But, there are interventions we can adopt now to mitigate the risks in the short-medium term. The priority is to ensure consumers have access to objective, impartial financial advice and pension decumulation ‘defaults’ to allow them to identify safer, better value options.

Our submission can be found here: Work and Pensions Commitee Pensions Freedom and Choice-FIC final submission

The Work and Pensions Committee terms of reference can be found here:

https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/inquiries/parliament-2017/pension-freedoms-17-19/

[1] The filling of the retirement savings pool needs to be speeded up anyway

 

 

FCA Credit Card Market Study: dealing with persistent debt, CP17/10

The Centre responded to the FCA’s consultation on proposals for dealing with persistent debt in the credit card market.

We argued that the nature of the problems identified by the FCA’s comprehensive analysis of the credit card market means that any interventions should have three separate but connected objectives:

• To encourage better consumer behaviours and change market norms in the consumer credit market – that is pre-empt and prevent a build-up of persistent debt and encourage borrowers to pay down debt quicker and so save money;
• To protect borrowers from exploitative and unfair practices – that is, the application of very high charges to what is in effect a captive market; and
• To promote a more competitive market – from the consumer perspective.

Interventions will have to address legacy problems and fix the market for the future.

We used those criteria to judge the FCA’s proposals. With this in mind, we were pleased that the FCA has recognised the problem and welcome some of the FCA’s proposals on interventions to help borrowers manage persistent and problem debt.

But, taken in the round, we do not believe that the package of proposals will be effective. In particular, we are very disappointed and perplexed that the FCA has not included potentially the most effective remedy – capping fees and interest rates on credit cards – for consultation. Capping the total cost of credit has been shown to work very effectively in the payday lending market. Capping fees and rates in the credit card market would be a more direct way of meeting the desired objectives of encouraging better behaviours and changing market norms, protecting borrowers, and promoting real competition.

Ruling out a remedy which has been shown to work in similar conditions without even consulting on it, or even explaining the decision, is worrying from a consumer protection perspective. But it also goes against the principles and practices[1] of good regulation.

The FCA already has a duty to make general rules ‘with a view to securing an appropriate degree of protection for borrowers against excessive charges’[2]. Therefore, it would have been well within the FCA’s remit to consult on a total cost of credit cap (including fees and rates). Significant numbers of borrowers in the credit card are still paying effective rates of more than 100% and are experiencing more detriment than payday lending borrowers. A cap on fees and rates in the credit card market would be entirely proportionate and would ensure regulatory consistency.

Behavioural interventions such as those proposed in the CP are very much unproven interventions. Any intervention which requires changes in consumer behaviour involves a great deal of uncertainty. Achieving sufficient behavioural change will be laborious and resource intensive. Whereas, capping rates and fees would have a demonstrable, direct and rapid effect on firm behaviour and, therefore, on the financial wellbeing of borrowers. We urge the FCA to go back to the drawing board and now consult on the introduction of a cap on consumer credit.

Nevertheless, some of the proposed remedies may make some difference in protecting vulnerable consumers in the meantime until better remedies are adopted. For example, ensuring faster repayments of balances is important as is requiring firms to improve their forbearance practices. But these can also be enhanced.

Rather than focus on persistent debt alone, the FCA should be thinking about persistent and/ or problem debt. The FCA’s approach means that a borrower could end up paying more in fees and rates than principal over a one year period and not be caught by these proposals. By any reasonable definition, paying more in fees and rates than principal over a one year period is problem debt. Therefore, we argue that the trigger points for intervention should 12 and 24 months.

Additional measures are needed to change market norms in this market. Therefore, we make two recommendations on this score. The FCA should change the default position on borrowing so that lenders cannot increase credit limits without express request and consent of borrowers. Similarly, the FCA should now actively consider requiring an increase in minimum repayments to a higher default level so that outstanding balances are repaid more quickly – of course, without causing financial difficulties for borrowers involved.

The FCA has determined that its concerns about unsolicited credit limit increases should be dealt with through voluntary industry remedies overseen by the Lending Standards Board (LSB). Of course, we support any interim initiatives to deal with this problem until more effective measures are introduced. But, it is of concern that the FCA does not appear to have committed to making public the compliance data, nor its own assessments of whether the LSB’s monitoring is robust enough. This oversight needs to be rectified. The FCA needs to commit to publishing compliance data plus regular assessments of whether this voluntary initiative is appropriate.

Our full submission can be found here: financial inclusion centre FCA persistent debt CP17-10 condoc final

[1] Openness to ideas, transparency, balance and objectivity, and consultative

[2] See CONC 5A.1.4, FCA Handbook, https://www.handbook.fca.org.uk/handbook/CONC/5A/1.html?date=2016-08-19

FCA Mission document

The Financial Inclusion Centre submitted a response to the FCA’s ‘Mission’ document consultation. We are very encouraged that the FCA is consulting on its mission. The document itself is very helpful for communicating the FCA’s priorities and how the FCA approaches its work.

In particular, we are very pleased about the greater emphasis now placed on vulnerable consumers. We support the view that resources should be concentrated on vulnerable consumers who are less able to withstand the impact of market failure or consumer detriment. This is more evidence that the FCA is adopting a more consumer-focused regulatory culture.

But we raised concerns about the FCA’s emphasis on what is known as ‘information asymmetries’ to explain market failure in financial services. There have been numerous attempts to use information disclosure to empower consumers in the hope that this will make markets more competitive, efficient, and firms treat consumers fairly. This has not been effective and the renewed emphasis on information disclosure and competition as a way of making markets work is a regressive step.

For further reading and to download the submission click here: FCA Mission consultation

FCA’s Financial Advice Market Review (FAMR) call for input

We welcomed the call for input into the so-called ‘financial advice gap’ in the UK – concerns that large numbers of consumers are unable (or unwilling) to access good quality, appropriate financial advice. Good advice is critical for promoting financial inclusion, financial resilience and security amongst households – particularly lower-medium income households which are the focus of our work at the Centre. But, it is important that we understand the real causes of the advice gap. Claims that over-regulation is the primary cause of the advice gap are wrong or disingenuous and used to try to reduce much needed consumer protection. Remedies based on false analysis would exacerbate rather than improve the situation.

For further reading and to download the response click here: FCA FAMR consultation

Reforming Financial Markets 
The Financial Inclusion Centre submitted its response to HM Treasury’s important consultation on reforming financial markets. The Centre argues that the priorities for government intervention and financial market reforms should be to reform financial markets… Read More/Download Response

Ensuring access to a basic bank
A response to the European Commission’s consultation on how to ensure European Union citizens have access to a basic bank account… Read More/Download Response 

A Review of Retail Distribution
Response to the FSA’s proposals to reform the distribution system for retail investment and pension products… Read More/Download Response

Banking Reform – Protecting Consumers
Response to the discussion paper issued by HM Treasury, the Financial Services Authority, and the Bank of England on reforming the deposit protection scheme in light of the Northern Rock scandal… Read More/Download Response