Lenders have been warned to expect extra scrutiny on how they treat borrowers during the pandemic, with a particular focus on digital lending, according to Equifax.
Equifax, a credit reference agency, warned that the shift towards digital lending and open banking that the coronavirus pandemic has caused will come with its own set of challenges.
Open Banking Expert at Equifax, Robert McKechnie, said that financial service companies have discovered the “true value and benefit of technological transformation and investment” during lockdown.
He warned though that the Financial Conduct Authority (FCA) are likely to be looking even more closely at how lending decisions are made and how struggling borrowers are treated as the pandemic continues.
His warning comes as the FCA announces more details of its imminent review of the unsecured credit market. The FCA are expected to target buy-now-pay-later models in particular.
At the annual meeting that was held digitally last week, the FCA’s board discussed various topics from online ad scams to overdrafts but it was its review of the unsecured consumer credit market that caught the attention of lenders.
Outgoing Interim Chief Executive at FCA, Chris Woolard, said he’ll be looking at buy-now-pay-later deals and loans that are linked to borrowers salaries, both of which normally fall outside of the watchdogs focus areas.
The two products normally fall outside of the FCA’s jurisdiction thanks to an old law “intended to deal with other things” according to Woolard.
The FCA revealed they have seen a shift towards these kinds of lending products, particularly after the collapse and exit of various payday lenders in recent years. The board meeting saw the FCA asked whether the disappearance of high-cost credit providers thanks to more regulatory scrutiny may leave people with little choice but to turn to illegal money providers.
The regulator asked whether the FCA should have worked with the lenders to rectify their mistakes rather than have them leave the market, potentially leaving borrowers more vulnerable to illegal lending options.
Woolard answered, “Clearly we have seen a lot of regulatory activity in this market. There was significant misconduct that needed to be rectified. We’ve also seen a range of findings by the financial ombudsman that relate to the misconduct part of that equation.
“So, there have been big pressures on this part of the industry. There’s often a proposition offered that, if many of those lenders exit the market, what we’ll see is unregulated lending among backstreet operations, and illegal money lending. On the whole, we don’t see huge evidence of that happening, despite that contraction, and we work very closely with Trading Standards and the illegal money lending team.
“What we do see in other parts of the market is innovation. This is largely in the retail space outside our perimeters. Part of the reason for the review is to take stock of that market and see how it’s developing.
“At the heart of this, is the question around if there’s a sustainable and compliant business model, when you rectify those problems and remove those harms to consumers. Are those businesses capable of staying in the market? In many cases, the answer was no.”