Contribution
My Lords, I thank the Minister for introducing this order and for his thorough summary. It is an important measure, and the Committee is surprisingly thin today.
Borrowing with a defined repayment period is a long-standing practice, with many well-established advantages that most of us have benefited from: for example, in respect of mortgages on our homes. It is a good thing that innovation—buy now, pay later—has developed the lending market but, as always, we need to have an eye on the potential downsides. In this case, that refers above all to the possibility of unsophisticated borrowers getting into financial trouble, probably because of an inaccurate assessment by lenders of the likelihood of any loan being repaid. I accept that in such cases a degree of protection may be justified. That is the philosophical and economic background.
However, there is a need for balance so that regulation does not simply close down the borrowing arrangements, which will make life harder for hard-pressed consumers and will risk pushing them into the hands of loan sharks. Another concern is the impact on small businesses, whether in financial services or retail, which we need to protect from overburdensome regulation. The spark of enterprise risks being snuffed out by this Government if they are not very careful about how they treat the smaller operators. Excessive red tape will simply reduce the services available to consumers and increase costs and prices.
Over the past few years, consumer spending habits in the UK have undergone a significant change. There has been a surge in the use of buy now, pay later schemes, with 14 million consumers recorded as using the agreements in the six months leading to January 2023. This is, however, still a much smaller market than credit cards. We recognise that there are growing concerns about consumer harm in the sector, with 44% of frequent users of such schemes overindebted in 2022, according to an FCA survey. Misleading promotions, lack of affordability assessments and the possibility of accumulating high debts are examples of the potential harms identified for consumers.
Under the previous Government, the 2021 Woolard review proposed the urgent regulation of buy now, pay later payments, but we did not have time to carry this through to completion, so I welcome today’s statutory instrument, which builds on this legacy and addresses lending practices that could harm consumers if they remain unchecked. The proposed order will require buy now, pay later product lenders to be authorised by the FCA, which will give consumers a wider range of protections, including access to the Financial Ombudsman Service for redress.
The instrument also requires firms to carry out affordability checks on borrowers and offer clear product information to consumers to prevent unaffordable borrowing. The proposed order rightly offers more protection for consumers, but we must also be sensitive to business voices operating in the buy now, pay later market. We must be conscious that being subject to FCA rules is not a walk in the park. I speak as a former non-executive director of a challenger bank. So I would like the Minister to explain how the FCA plans to develop and implement the buy now, pay later rules over the next 12 months and who they will affect. For example, would Klarna or Clearpay do all the consumer checks, or would they also pose a burden on the retailer—Boots, for example, or a specialist online retailer of the kind the Minister mentioned?
I also need an assurance that the regulator will have the capacity, and indeed the will, to approve the three significant suppliers and the others that are caught by the new regulations, and to do so comfortably within the 12-month timeframe. It will take time to develop the rules on creditworthiness and affordability, and a year is not long. In my experience, the FCA is much more concerned about its consumer duties than keeping business running and innovating. In the helpful impact assessment on this order, the compliance costs are assessed at some £19 million to £32 million over 10 years. This estimate seems far too low to me, from my experience of dealing with FCA regulation in three different entities. Of course we need to do the right thing, but the regulatory and legal costs in financial services such as these continue to mount, and that then hits innovation and growth.
So I would welcome some reassurance from the Minister on this score and an undertaking that there will be continued engagement between the industry and the Financial Ombudsman Service, because that can also be a vehicle for delay and inconsistency. To put the change in perspective, I would also appreciate an update on the current level of over-indebtedness by frequent users—the worrying figure of 44% that I quoted from 2022—and an indication of the proportion of the total number and value of buy now, pay later borrowers that they represent. I am interested in how many indebted purchasers there are and how significant in number they are in the big scheme of things.