Digitalisation…and simplification

The past year demonstrated the importance of online and digital services and accelerated their use. Whilst payments might have led the way somewhat in this area with the implementation of PSD2 and Open Banking, the pandemic has certainly highlighted the value in being able to digitalise the customer experience more broadly – whether in the form of access to information, food, payment facilities or lending.

Wider adoption of Open Banking and Open Finance

As of yet, developments in the Open Banking and Open Finance spheres have not been widely accepted by consumers and there has yet to be a silver bullet use case for Open Finance sufficient to persuade sometimes sceptical consumers to engage. However, potential economic recessions and unstable markets will make financial management more important to consumers than ever.  Open Banking and Open Finance may therefore be able to offer consumers ways of managing their money they had previously felt unnecessary.

Big technology companies making further in-roads into the financial services market

The increase in non-bank lenders and payments service providers, particularly in the Fintech space, means customers have more choice and flexibility. As the spotlight shifts increasingly quickly from the high street to the online market place, we might (finally) see big technology companies make the leap more fully into the financial services market. However, opportunities created as customers have become used to a socially distant, digitally supported world are accompanied with a number of challenges.

Simple T&Cs will be the name of the game

A recurring theme will be the need to simplify customer terms and conditions to ensure they remain accessible and, crucially, sufficiently informative, when a customer must be able to view them on a small screen, and to accept them with a swipe of a finger or a click of a mouse. There are several competing factors that complicate the process: the importance of transparency and prominence, ensuring intelligibility whilst retaining (possibly complex) terms essential to the provider, and meeting prescribed form and content requirements (not least for regulated credit agreements).

Balancing automation with fair customer outcomes

Communication channels will be another area of focus – how to use chatbots and other automated approaches in a way that achieves fair customer outcomes. Firms will need legal support to ensure that this new and/or increased use of automation still leads to good customer outcomes, and that customers are aided in their understanding of the options they choose. With an eye to the continuing regulatory focus on vulnerability in particular, they will also need to maintain a balance between increased automation and ensuring that customers who need it are able to access support through traditional channels.

More data access: improvements to customer service versus increased responsibility

Increased access to a wealth of data will improve providers’ knowledge about their customers, potentially enabling a more tailored service. This could include being able to identify other bank accounts or lending products that are suitable to that customer’s behaviour, or being able to perform an improved creditworthiness assessment.  However, dealing in a wholly online environment can make it harder to deliver the right customer outcomes. For example, it might be more difficult to identify potentially vulnerable customers. Similarly, with banking and payments becoming increasingly digitalised firms will need to work out how much friction to add to the customer experience to protect non-tech savvy customers from increasingly sophisticated fraudsters.  There is also an emerging trend from regulators that with increased data resulting from digitalisation comes increased responsibility, with providers being expected to monitor for signs of financial difficulty – for example, caused by problem gambling – and perhaps take a more paternalistic approach. Whilst clearly such firms can play an important role in spotting problems at an early stage, could this be the thin end of the wedge in making firms shoulder more responsibility for poor customer outcomes that are ultimately driven by the customer’s behaviour?

Emerging problems

Whilst the pandemic has shown just how essential online services can be, it has also stored up problems for the future, with measures designed to keep the show on the road coming to an end in the first part of 2021. 

Deferred debt problems coming home to roost

For example, the extended payment deferrals schemes are due to finish in mid-2021 and repossessions are currently permitted to start from the end of January. There is a risk that the can has simply been kicked down the road in the short term, with lenders finally having to deal with increased numbers of borrowers in financial difficulties at a time of economic uncertainty, when there will be increased focus on arrears handling, the impact on problem debt and mental health issues, the introduction of breathing space rules and a renewed focus on vulnerable customers. Repossession orders, which had fallen in 2020 as a result of FCA intervention, will likely be on the rise again. Lenders will therefore need to allocate even more resources to their default and repossession functions to ensure customers are dealt with fairly.

Mortgage market lull will focus lenders’ attention on ways to recoup lost income

In the same vein, the stamp duty holiday introduced for properties with a value of up to £500,000 comes to an end in March 2021, which may contribute to a natural lull in the mortgage market. Lenders will have to consider how best to recover lost income and what changes to pricing they can make to mortgages in future, e.g. through increases in expected LTV and increased interest rates.

Prudential focus putting pressure on already-stretched firms

The increased reliance on online banking and payment products has caused regulators to focus on operational resilience and on capital and liquidity requirements, with a possible over-reliance on group structures in the payments and e-money space. 

There is a similar focus on prudential requirements for investment firms and, indeed, FCA regulated firms generally.

Much of this is motivated by regulators trying to ensure they don’t preside over firms going under or grinding to a halt, causing loss to customers at a time when they are already struggling with the economic impact of COVID-19. However, the cost of meeting such increased demands (whether it be an overhaul of a firm’s outsourcing requirements, or holding increased reserves) may put additional stress on such companies – particularly Fintechs.

It’s tempting to speculate that this will prompt firms to look to sure up investment at a time when market distortions might be revealed under the pressure of an economic downturn. This is likely to have an impact on the pattern of acquisitions, consolidations and public offerings over the next 12 to 24 months, and the approach potential investors are likely to take to risk.

A chance for a new regulatory landscape?

Aside from making the minimum changes necessary to UK legislation to ensure a smooth transition, everyone has remained relatively quiet about the possibility of divergence from the EU after 2020.

Post-Brexit regulatory mix of standardisation and divergence

In the UK, the regulators have been pretty generous in their application of transition measures to ensure there is no cliff edge in terms of compliance, and in offering a temporary permissions regime for incoming firms.

So far, so status quo. And it might well be the case that the UK needs to march in time with the EU in certain areas, with standardisation being more critical in some than others (for example, the uptake of Open Finance). And yet there is no doubt that scope for divergence exists and is, at some level, inevitable. There are already differences in the approaches to the implementation of SCA in the e-commerce space and to cross border payments regulation.

On-going review of current UK payments and lending regulation

At the same time, the UK is in the process of a wide-ranging review of several areas key to the payments and lending space, to determine how they might be better regulated in the UK. These include:

• Several initiatives in the payments space, among which are HM Treasury’s review of the UK payments landscape,  the Bank of England’s consideration of a model Central Bank Digital Currency,  the ongoing drive to tackle and fund APP fraud redress, and the Payment Systems Regulator’s review into card acquiring services.
• The report from the government’s Fintech Strategic Review is due at the start of this year and may make recommendations for the way that Fintech is regulated in the UK.
• The Woolard review is looking at consumer credit more generally, with the FCA seemingly keen on increasing consumer protections. HM Treasury is still to respond on its review of retained provisions from the Consumer Credit Act regime, but the review of financial services generally may include this. If so, it’s possible that the Treasury  would be more receptive to a unified consumer credit regime under FSMA rather than the current split regime.
• The FCA’s guidance on vulnerable customers is expected in final form in Q1 2021.

The UK regulators have always taken a proactive and leading role in legislating and regulating the financial services sector and this is unlikely to change. It remains to be seen if this means they will merely innovate and progress where they can, and stay in step with the EU where they can’t. Or whether the regulators see opportunities to try new things and lead by example, albeit from the outside looking in.

So what next…

In many ways 2021 might be a year of surprising contrasts. Firms once again being permitted to collect and enforce debts as the COVID-19 crisis (hopefully) lifts, but doing so at a time of increased economic uncertainty when such actions may be under even greater scrutiny. Increasing innovation to deal with unusual circumstances, against a regulatory backdrop that purports to be business as usual. Whatever shape it takes…it’s unlikely to be dull.

Let’s continue the conversation about the regulatory year ahead for payments and lending.  Join us on 20 January for a webinar on the key themes and challenges likely to be faced by firms in the consumer credit sector in 2021.   For more information and to register for this event, click here.

Authored by Charles Elliott.