It’s been a significant week for regulated consumer and business lending regulation in the UK, with three key developments:
The Times reporting that Barclays Partner Finance, for many years the largest provider of retail point of sale finance, is ‘scaling back’ its operations, because ‘the technology platform it uses is old and uncompetitive’, until it develops a replacement.
The publication of HM Treasury’s consultation on draft legislation for the regulation of Buy Now Pay Later (BNPL).
The Financial Conduct Authority’s public censure of Amigo Loans Ltd for failing to conduct adequate affordability checks on borrowers and guarantors.
There’s plenty to consider across all three topics, but perhaps there’s one common theme: The need for high quality technology. Or, more precisely, the need for RegTech: Software that helps lenders to robustly demonstrate compliance with FCA (and other) regulations without making it too difficult for customers to apply for and obtain the credit they need.
Barclays Partner Finance
It might seem odd for Barclays to be scaling back its retail finance, given that around 18 months ago, Barclays Chief Executive Jes Staley announced a new retail finance deal with Amazon as part of the bank’s move to double its revenue from payments over three years. However the writing has arguably been on the wall for a while (see my May 2021 blog here).
For Barclays, assuming the Times report is accurate, it’s clear that the technology has driven its decision, and it seems very likely that the need for RegTech is a key part of this.
Barclays Partner Finance has suffered losses from not having evidence of regulatory compliance by its retail introducers, including reported payouts of £180m to timeshare customers in 2022, and provisions of £38m relating to solar panel installations in 2019 (both losses being the result of activities in earlier years.
Relying on sales staff at retailers to help customers to apply for credit seems too risky now for lenders to deal with. Instead, lenders have to take control of the application process by requiring applicants to use their own technology that collects evidence of compliance with regulations.
BNPL regulation
HM Treasury’s consultation only deals with the scope of BNPL regulation, rather than the detailed conduct rules that will be eventually be the subject of consultation by the FCA. Regulation of BNPL continues to develop very slowly.
As hinted at in earlier papers, it is now proposed that retailers offering up to 12 months interest-free credit will not be regulated. Those offering interest-free credit for longer periods (with greater consumer benefits, it might well be argued) will remain regulated. It's just one of the oddities of the proposals, which could have been avoided by tweaking the existing rules to make clear that lenders that offer numerous loans within a credit limit are actually offering revolving, and not fixed-sum credit. For the first time, the Treasury acknowledge the existence of such arrangements in this latest consultation. See my earlier blogs, including from June 22, There's a better way to regulate BNPL.
It also seems that Business to Business BNPL will be caught by the new regulations (for unincorporated businesses, based on the existing consumer credit rules). That must be discouraging for those calling for business finance to be scoped-out of the consumer credit legislation
Despite not going into details, it’s clear enough that the Government expects there to be affordability checks before loans are made. Relying only on credit checks is unlikely to be sufficient, as that doesn’t provide enough information about future affordability. As a result, there’s likely to be a need for consumers to provide at least some high-level details of their financial situation as part of the application process. Collecting this information is unlikely to work out well if the customer is in a queue at the checkout in the shopping centre on Saturday afternoon.
The working solution from Klarna and the others (or those that are left in the UK BNPL market, with several players having recently quit) is to offer ‘over the top’ solutions. This is where the customer has an ongoing account with the lender. It reduces the information that needs to be gathered at each point of sale, and means the customer can take out credit for purchases at most retailers. But the BNPL provider loses its main source of income - retailer subsidies. Without those payments, it's no surprise the viability of BNPL is being questioned.
BNPL providers will need sophisticated and fast application technology that works at point of sale, meets the (still to be announced) affordability regulation requirements, and doesn't rely on 'over the top' accounts.
Amigo Final Notice
Apart from the FCA waiving a fine of almost £73 million on the basis that it would cause ‘financial hardship’ for Amigo, the Amigo Loans final notice provides several insights into how the FCA interprets its own rulebook.
Tip to the Head of Regulation visiting from Mars: Read recent Final Notices before reading the FCA handbook. Instead of just hinting at what the regulator expects to see, it’s the Final Notices where the FCA says what it really means.
Some examples:
Amigo relied on application systems that could lead to applications being approved where there were ‘indicators that the borrower could not afford the loan or where there was insufficient evidence to confirm the loan was affordable.’
Amigo ‘unduly relied on information provided by customers’ on their income and expenditure and did not ‘adequately consider the sustainability of income and expenditure’.
Amigo’s affordability assessment could rely on the income of the partner of the applicant, without checks being carried out to confirm the partner’s income and their expenditure.
The FCA’s Final Notice is specific to Amigo and it can’t be assumed that the regulator would expect other firms to adhere to the regulations in precisely the same way. Yet the challenges are clear: The need to confirm affordability of loans, comparing information provided by the customer with other information, whether that is from credit reports, statistical data, or open banking. Amigo demonstrates that using technology is no panacea, but at the same time, it’s difficult to see how regulatory compliance can work without it.
RegTech
If this all points to the need for RegTech, it also raises the question of whether sufficient technology exists to meet the needs of credit lenders.
There’s firms in the market presenting their solutions as offering support with regulatory compliance, but a lot of their functionality is ‘behind the scenes’ compliance such as regulatory reporting or complaints management. That's important, but not enough.
There are also some encouraging options in niche frontline areas, including affordability and handling vulnerable customers.
But is there enough regulatory compliance logic in core consumer credit lending systems, and sufficient options for integration of specialist compliance solutions with core systems? After this week's developments, it's a question many in the industry will be asking.
For details of my research into consumer credit markets, including Retail Point of Sale Finance, BNPL, and Non-Prime Credit in UK and Europe, published with Apex Insight (2023 editions soon to be available) please see my Consumer Credit Resources page