Innovation in Consumer Credit: Balancing Disruption with Regulatory Compliance

The consumer credit market is evolving rapidly. From digital-first lenders and AI-driven underwriting to buy-now-pay-later (BNPL) products and open banking-enabled affordability checks, innovation is reshaping how consumers access credit—and how firms assess, manage, and recover lending. 

Innovation brings opportunity: better customer experiences, more inclusive lending, and improved operational efficiency. But it also brings risk—particularly regulatory risk. 

The FCA has made it clear that innovation doesn't mean a free pass. New business models, technologies, and products must still deliver fair outcomes, meet regulatory expectations, and protect consumers from harm. 

So how do you balance disruption with compliance? And what does good regulatory engagement look like when you're doing something new? 

The Innovation Imperative: Why Consumer Credit is Changing 

Consumer expectations have shifted. Customers now expect: 

• Speed: Instant decisions, real-time approvals, and seamless digital journeys 

• Flexibility: Products that fit their circumstances, not rigid one-size-fits-all offerings 

• Transparency: Clear information about costs, terms, and obligations 

  
  

At the same time, firms are leveraging new technologies to: 

• Improve access: Using alternative data sources to lend to customers traditionally excluded from mainstream credit 

• Enhance affordability assessments: Open banking data provides a fuller picture of a customer's financial situation than traditional credit scores alone 

• Streamline operations: Automation and AI are reducing manual processing, cutting costs, and improving consistency 

  
  

But with innovation comes complexity—and the FCA's regulatory framework doesn't always neatly accommodate new approaches. 

The Regulatory Challenge: Where Innovation Meets Compliance 

The FCA's regulatory perimeter is broad, and its expectations are principles-based. That's a strength—it allows for flexibility and adaptation—but it also creates uncertainty for innovators. 

Here are some of the common regulatory challenges we see firms grappling with: 

1. Affordability in a Digital World 

If you're using automated decisioning or AI-driven underwriting, how do you ensure your affordability assessments are still robust, individual, and comply with CONC requirements? 

The risk: Over-reliance on algorithms without sufficient human oversight or explainability can lead to poor lending decisions—and regulatory criticism. 

What good looks like: Make sure your models are tested, validated, and regularly reviewed. Document how your technology supports (rather than replaces) sound affordability judgments. And be ready to explain your approach to the regulator. 

2. Financial Promotions for New Products 

Innovative products often require innovative marketing—but the FCA's rules on financial promotions haven't changed. If your product is complex, unfamiliar, or has features that could be misunderstood, your promotions need to work even harder to be clear, fair, and not misleading. 

The risk: Customers who don't fully understand what they're signing up for are more likely to experience harm—and more likely to complain. 

What good looks like: Test your promotions with real customers. Make sure key information is prominent and easy to understand. And don't assume that just because your product is digital, your communications can be vague or incomplete. 

3. Data Usage and Privacy 

Many innovative credit models rely on accessing and analysing large amounts of customer data—whether that's open banking data, transactional analysis, or alternative data sources like utility payments or rental history. 

The risk: If you're not transparent about how you're using data, or if you're accessing information without proper consent, you risk falling foul of both FCA conduct rules and data protection law. 

What good looks like: Be clear with customers about what data you're using and why. Make sure your consent processes are robust. And ensure your data usage complies with both FCA and ICO expectations. 

4. Treating Customers Fairly When Things Go Wrong 

Innovation doesn't eliminate the risk of customers falling into difficulty—in fact, it can sometimes create new risks. For example, BNPL products may feel "easier" to take on than traditional credit, leading customers to overcommit. 

The risk: If your forbearance and collections processes haven't kept pace with your product innovation, you could end up treating customers unfairly when they need support. 

What good looks like: Make sure your customer support, forbearance options, and collections practices are designed with your product's specific risks in mind. And ensure your teams are trained to recognise and respond to vulnerability. 

Engaging with the Regulator: The FCA's Innovation Services 

The good news? The FCA knows that innovation is essential for a healthy, competitive market. That's why it offers several support mechanisms for firms developing new products or business models: 

The Regulatory Sandbox 

The Sandbox allows firms to test innovative products, services, or business models in a controlled environment with regulatory oversight. It's particularly useful if: 

• Your innovation doesn't neatly fit existing regulatory categories 

• You need clarity on how FCA rules apply to your approach 

• You want to test with real customers under close regulatory supervision 

  
  

The Innovation Pathways 

For firms that don't need the full Sandbox experience, the FCA also offers direct support through its Innovation Pathways. This includes guidance on navigating the authorisation process, interpreting rules, and engaging with the regulator early in your development process. 

When to Engage 

The earlier, the better. Waiting until you're deep into product development—or worse, until you're already live and facing regulatory questions—is a recipe for costly delays or redesigns. 

If you're developing something genuinely new, reach out to the FCA's Innovation team early. They're there to help, and engaging proactively demonstrates that you're taking compliance seriously. 

Balancing Speed and Compliance: Practical Steps 

So how do you innovate quickly without cutting corners on compliance? Here are some practical steps:

1. Embed Compliance from Day One 

Don't treat compliance as a final hurdle before launch. Involve your compliance team (or your compliance consultant) from the earliest stages of product development. That way, you can identify and address regulatory risks before they become expensive problems. 

2. Test, Test, Test 

Whether it's testing your affordability model, piloting your customer communications, or stress-testing your forbearance processes, thorough testing is essential. You need to know how your product performs in the real world—and how customers respond—before you scale. 

3. Document Your Approach 

If the FCA comes knocking (or if you're engaging with them proactively), you need to be able to explain and evidence your approach. That means: 

• Clear policies and procedures 

• Records of decision-making and risk assessments 

• Data on customer outcomes and product performance 

  
  

4. Be Prepared to Adapt 

Innovation is iterative. You won't get everything right first time, and that's okay—as long as you're monitoring outcomes, learning from experience, and willing to make changes when needed. 

Looking Ahead: Regulatory Trends to Watch 

The FCA's approach to innovation in consumer credit is evolving. Here's what we're keeping an eye on: 

• AI and automated decisioning: Expect more guidance on how firms should govern, test, and explain AI-driven lending decisions 

• BNPL regulation: The FCA has confirmed that BNPL will be brought into the regulatory perimeter—firms in this space need to prepare for full FCA oversight 

• Open banking and data sharing: As open banking becomes more embedded in lending, expect greater scrutiny of how firms use and protect customer data 

How Adempi Can Help 

At Adempi, we work with innovative consumer credit firms to navigate the regulatory landscape without losing momentum. Whether you need: 

• Regulatory gap analysis to identify compliance risks in your new product or business model 

• Support engaging with the FCA, including preparing for Sandbox applications or regulatory visits 

• Policy and procedure development tailored to your innovative approach 

• Training for your teams on how to deliver innovation compliantly 

  
  

…we can help

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Our consultants combine deep regulatory expertise with a practical, commercial mindset—because we know that innovation only works if it's both compliant and commercially viable. 

Get in touch if you'd like to explore how we can support your innovation journey. You can reach us at contact@adempi.co.uk or on 0203 925 4761 

Or to prepare your business for whats next or find out more about our services from the website: Adempi - FCA Compliance Consultants.