The Woolard Review into unsecured credit was published with great fanfare in early February, welcomed by the Financial Conduct Authority (FCA), who then followed up by setting out how they will implement key parts of it in July. I was on the Review panel, and supported its recommendations.

 

I had hoped they would implement all of it, and that could still happen, as we need forward-looking regulation to protect consumers and to ensure companies know what they need to do. The FCA’s new proposed Consumer Duty of Care will help here, but I think in certain areas hard rules work better than principles, as they leave no room for interpretation, which I think would be beneficial to customers and companies.

 

Responsible companies, of course, do not set out to treat customers poorly, but unfortunately, it happens. To me, problems can really mount up when companies fall outside of the regulatory rule book, or when principles appear to get applied differently over time.

 

The Woolard Review and FCA’s new Consumer Duty of Care are focused on future regulation, which is vital, yet it’s important to place this in the context of what’s going on in the market today. In the last couple of years, the High Cost Credit Market has been virtually wiped out. More than a billion pounds worth of credit has been removed from the market in a small amount of time, and unfortunately at this point, credit unions and community development finance initiatives can’t fill the void.

 

This has been aggravated further by COVID, and with the FCA rightly clamping down on those pockets of the market that would not change their poor behaviour. Overall, these factors have greatly reduced supply. Against this backdrop, some unscrupulous claims management companies (CMCs) have taken advantage of regulatory arbitrage, which has resulted in the reduction of credit. Of course, not all CMCs are bad, but like every sector, there are some bad apples.

 

Now every responsible financial services company tries to treat its customers fairly, but it is how this is being looked at retrospectively that is causing problems. As we have principle-based regulation, rather than rules, what appears to be happening is that those principles are being judged through today’s lens, rather than how it was seen at the time – in effect the past is being judged by today’s standards. Therefore what was right then, can be judged to be wrong now.

 

Unscrupulous CMCs have realised this, and have turned it to their advantage. They are farming customer complaints, and with little or no due diligence or care, dumping them on financial service companies, primarily those operating in the subprime space. When the complaints get resolved, either in their clients' favour or not, the CMCs then go on to dump the complaints on the Financial Services Ombudsman (FOS) – which is entirely in their best interests.

 

What happens next is a familiar picture, as very quickly the Ombudsman’s service gets overwhelmed. Due to the backlog of complaints needed to clear, FOS deploy formulas and mass claims principles and move away from their principle of judging every complaint on an individual basis. The move away from an individual case approach by the FOS to a mass one has one key consequence, it reverses the majority company upholds to a majority of customer upholds.

 

In a stroke, the CMCs have won, and as a consequence companies trying to do the right thing by their customers get overwhelmed by the CMC driven complaints, and then have to exit the market and often go out of business.

 

To some, this may appear a good outcome, but to me, it’s not, especially for the customer. This feels a long way from the vision set out when the current regulatory environment was established. The one clear winner here is the CMCs, who have in effect found a way to weaponise FOS to their own advantage, and FOS can do nothing about it.

 

When companies leave the market, jobs are lost, tax revenue is lost, and credit to an under-served part of the market is also lost. Most importantly though, customers who had rightful redress do not get it as the companies no longer exist – so they lose out as well. The CMCs, on the other hand, have taken their 30% cut, made their profit, and moved on.

 

To me, it is deeply worrying when unscrupulous CMCs who have questionable incentives, become de facto consumer champions. I would be most intrigued to see a CMC’s balanced scorecard for measuring customer outcomes – I have a feeling they wouldn’t be as robust as the financial services industry.

 

The FCA always has a lot on its plate, and I’m very supportive of what they’ve done since they were established to improve the outcomes for customers. Nonetheless, I implore Nikhil Rathi, the new FCA Chief Executive officer, to look at who is actually benefitting from these regulatory outcomes when they review the future of unsecured credit regulation.

 

It is imperative he and his colleagues look at how past regulation is operating, and stop any unintended consequences; after all what looks good on paper, doesn’t always work in practice, and in unison with HM Treasury and FOS decide who is actually benefitting from some of its regulatory outcomes. To me, it’s not always the customer, which can’t be right, can it!