Black Friday: Financial Products

John Glen Excerpts

Tuesday 23rd November 2021 Westminster Hall

[The Economic Secretary to the Treasury (John Glen)]

It is a pleasure to serve under your chairmanship, Mr Robertson. I associate myself with the remarks of a number of Members this afternoon concerning the death of Sir David Amess. He was a true blessing to this Parliament and a great character whom we all loved, and he will be sadly missed.

I have listened carefully to the various contributions this afternoon. As ever, this has been a very well-informed debate that I welcome very much. I pay particular tribute, as I have done previously, to the hon. Member for Walthamstow (Stella Creasy) for securing a debate on this important matter. I will be sure to give her some time to have another go at me in the last few minutes of the debate. She set the scene very well, explaining the context that we face in the run-up to Christmas: the inducements to consumption and the apparent savings for consumers; the evolution in new forms of credit; the need for regulation, which I fully accept at the outset; the risks around the use of buy now, pay later becoming habit-forming; the behavioural shifts we are seeing in the market; and the need to really think about the context of borrowers’ behaviour as we bring forward this regulation. As ever, we were treated to some sophisticated analysis of the wider consumer credit challenges, and the issues with making more affordable credit available, from my hon. Friend the Member for Blackpool North and Cleveleys (Paul Maynard). I will address those points later.

It is important that we start this afternoon by understanding the Government’s position: we recognise that there is a potential risk to consumers from unregulated buy now, pay later products. I listened very carefully to the criticisms of the timeline, and over the next few minutes I will address the challenges we have encountered and present some of the solutions that we think may exist. It is extremely helpful for all parties to be represented in this debate; given the level of engagement from players in the market, there is a clear desire to address this significant area of concern in Parliament. There has been a massive explosion in this area, and it is important that we respond appropriately.

It is important to understand the nature of the risks. We should acknowledge that the use of buy now, pay later is growing rapidly: in fact, the number of transactions from the main providers using buy now, pay later more than tripled in 2020. That said, buy now, pay later is still estimated to have amounted to only 2% to 3% of the consumer credit market last year, and a recent study by the consultancy Bain & Company found that about 5% of online transaction volumes involved the use of buy now, pay later. I am very sensitive to the distribution of that additional use and the people who are increasingly reliant on buy now, pay later—that is something we must take account of—but it makes up a smaller proportion of the market than is sometimes believed. In addition, we have not seen substantial evidence of the risks that some have predicted materialising.

I will set the scene of the current state of regulation, because it certainly does not mean that the Government are turning a blind eye. A degree of regulation already provides protections for users of interest-free buy now, pay later products. The Consumer Protection from Unfair Trading Regulations 2008 make it a criminal offence for traders to give consumers misleading information. Firms are required to provide consumers with the information necessary to make informed decisions and not omit or hide material information that the average consumer needs. The FCA and the Competition and Markets Authority are designated enforcement bodies for these regulations. The Consumer Rights Act 2015 requires that the contract terms of buy now, pay later providers must be transparent and not contain unfair terms. When promoting buy now, pay later products, firms must also comply with the rules set out in the UK advertising codes, and offending firms can be referred to trading standards and Ofcom.

Last year, the Advertising Standards Authority published formal guidance about buy now, pay later, setting out its expectations of both providers and retailers when they offer these services. The ASA also banned harmful buy now, pay later adverts, stating that future advertising must not irresponsibly encourage the use of a product, particularly

“by linking it with lifting or boosting mood”.

That is something that the hon. Member for Walthamstow has highlighted and campaigned on. Some buy now, pay later agreements are also already subject to some aspects of the financial promotions regime. The FCA uses its existing powers to protect buy now, pay later users, for example by scrutinising marketing materials of authorised firms and the way these products are promoted. The FCA has wider consumer protection powers that it can apply to unauthorised firms where it sees poor practice.

Effective Government oversight of financial services is not just about imposing rules; it is also about engaging with industry. In the case of the buy now, pay later sector, that is something we have done extensively—as have Members here today. We have seen that reflected in the actions of the largest firms, with many voluntarily introducing credit-worthiness checks and making information more transparent at checkout. However, I fully concede that that is not universal, and not every firm has moved in the right direction.

Looking ahead, the fact that we have seen some progress does not mean that we are complacent. As Members have noted, the Woolard review into the unsecured credit market, which was published in February this year, identified a number of potential risks. They include how buy now, pay later is promoted to consumers and presented as a payment option. Consumers are sometimes left with an absence of information about the product and the features of the credit agreement, and there are no requirements to undertake affordability and credit-worthiness checks. As has been pointed out, that is particularly important when multiple transactions are taken up with different buy now, pay later providers.

Following the publication of the Woolard review the Government announced, with support from the Opposition —I am grateful for their support—our intention to regulate these products. On 21 October, we published a consultation document that sets out the proposed approach to regulation, and that consultation is open until 6 January. Prior to the publication of the consultation, I had a lot of engagement with my officials. One of them is sitting here today, and I have spoken to a number of them this afternoon and numerous times before that. It is through a desire to get this right that we have taken time over it. There is no desire to go slow. I recognise that there is an urgency to this, and we have to move forward as quickly as we can. During the consultation period, the Government are engaging with representatives from consumer groups and industry—indeed, there is a workshop going on this afternoon—to ensure that the final approach to regulation strikes the right balance on consumer protections. Debates such as this help to inform that approach.

We want to expand the evidence base about the risk to consumers, and Members from across the Chamber have made a lot of points about that this afternoon. As I have said, the Government recognise the potential risks, and that has been supported in recent studies by consumer groups, such as Which?, Citizens Advice and others. However, the Government’s view is that as an interest-free product, buy now, pay later is inherently lower risk than products that charge interest. Used properly, it can be a way for consumers to manage their finances, as my hon. Friend the Member for Blackpool North and Cleveleys mentioned, and to spread the cost of purchases—particularly when managing periods of higher household expenditure, such as Christmas, when Michael Bublé CDs are being purchased in the household of the right hon. Member for Wolverhampton South East (Mr McFadden). We should not forget that interest-free buy now, pay later offers, specifically around Black Friday, can allow consumers to take advantage of offers and discounts that they might not otherwise be able to benefit from.

Looking ahead, and in the context of the ongoing consultation, our overall objective is to ensure that buy now, pay later products can continue to be offered in a way that allows consumers to take advantage of the flexibility of the offer, while ensuring that the potential risks are managed. That means designing regulation that is proportionate to the level of risk and takes into account the way that the products are used.

For example, the Government believe that is it reasonable that buy now, pay later products use a bespoke approach to consumer disclosures, as well as to the form that the credit agreement must take. That is reflected in the proposals in the consultation, which I would characterise as not reluctant, but detailed, reflecting the fact that different issues come up with the evolution in the market and in the provision of different services. We cannot apply a single, one-size-fits-all approach. I see that the hon. Member for Walthamstow is adjusting her face mask, so I think she wants to intervene.

[Stella Creasy]

I thank the Minister for letting me intervene. He will understand that I am a little troubled because when the Woolard review said in February that there was an urgent need for regulation, we all agreed that urgency, as well as regulation, was a critical part of that conversation. Does he accept that in the absence of such regulation, one thing that we now need to tell people —it is on his list—is that they cannot go to the Financial Ombudsman Service if they feel they have been mis-sold a product? At the very least, in the intervening time before any regulation comes forward, the Government have a duty to ask retailers and companies to make that clear to people—a buyer beware warning. Does he at least accept that the Government should be doing that this Christmas?

[John Glen]

I fully accept the point that the hon. Lady makes, in that at the moment, those protections do not exist, and that is why we have to regulate appropriately and proportionately.

I want to say a bit more about what I think we should be doing. It is reasonable that buy now, pay later products use a bespoke approach to consumer disclosures, as well as to the form the credit agreement must take, and that is reflected in the consultation proposals. However, we need to think about the way that these products are used in the context of an online journey, the warnings that are inherently there during that journey and the fact that they are frequently used for much smaller sums than the traditional credit agreements for which these rules were originally developed.

When we think about how this facility is used, part of the challenge is the way additional payment smoothing mechanisms can inadvertently be sucked in. I do not want dental payment plans—essentially, for expenditure that is smoothed over 12 months—to incur an obligation to do some form of affordability check. Such issues make this more complex than it may have at first seemed.

I am determined that we get this right, that we recognise the distinct consumer risks that exist and that we bring forward regulation that deals with them. The Government’s view is that buy now, buy later information should not be long and detailed so that it becomes just another long set of terms and conditions, because frankly there is a significant risk that people would just make a cursory observation of such a list and tick the box. Instead, the information should be presented in a form that allows consumers to engage meaningfully, and I hope the hon. Member for Walthamstow would support that.

The Government also consider in the consultation whether the financial promotions regime, which already applies to a broad range of financial products, should be amended to ensure that all buy now, pay later promotions fall into that regime, further strengthening consumer protection. That would mean that all promotions made by merchants, such as a retailer, would have to be approved by an FCA-authorised firm. It is also important that consumers are lent to affordably. That is why the Government anticipate that the proportionate regulation of buy now, pay later would include the application of the FCA’s current rules on credit worthiness.

The Government recognise that these products are lower risk than other interest-bearing agreements and can help consumers to manage their finances. A study by Bain suggests that in 2020 consumers using buy now, pay later instead of credit cards in the UK saved £103 million in interest. I say that not to commend it over credit cards, but to recognise the segmentation of the credit market and the different behaviours and options that exist out there. That is why we believe it is right that regulation is balanced and proportionate, ensuring that customers are given the appropriate protections, without unduly limiting the availability and cost of useful financial products.

As hon. Members have mentioned, there is already precedent for imposing different regulatory requirements on different credit products, depending on the risk they pose. The Government and the FCA have previously implemented bespoke regulation for higher-risk products, such as the price cap rules for payday lenders and rent to own. Obviously, it would be difficult to apply that symmetrically in this context, but I sincerely welcome the hon. Lady’s comments later. Likewise, a more proportionate approach is right for buy now, pay later products, which we assess to be of a lower risk.

As new products enter the market, it is critical that the Government carefully consider not only how credit products are regulated, but where the boundaries of regulation should be. I note the concern that buy now, pay later may increasingly be used as a more mainstream form of credit, as has been mentioned this afternoon, and that even some banks are beginning to offer it.

Many different types of financial arrangement already make use of the same exemption, as I mentioned earlier, which currently allows interest-free buy now, pay later to operate outside consumer credit regulation—and has done so for decades. That includes arrangements used over many years by UK retailers to support the purchase of higher value items such as home furnishings and white goods, but also those arrangements which allow monthly payments for memberships to sports clubs, dental plans, other associations and certain invoicing arrangements.

In regulating buy now, pay later, we need to think carefully about all the arrangements that these changes could affect and avoid bringing activities into regulation which do not present the same risks to consumers. What is in play here is the cumulative application of the buy now, pay later product to a vulnerable group of consumers, and we need to make sure that that is where we focus the outcome. The Government must also ensure that their approach is future proof and cannot be gamed by firms operating on the margins of regulation. That is why we are engaging with consumer groups in detail to ensure that we get this right and capture the emerging products that are beginning to form.

I will give the hon. Lady several minutes to come back, but I want to mention personal debt more broadly, because it is a critical topic that comes into this discussion. I think everyone here has a desire to tackle problem debt and, as this afternoon has shown, we share an understanding of the complexity of the issue.

We need comprehensive solutions, which is why we are maintaining record levels of funding for free debt advice in England. The Money and Pensions Service this year has a budget of £96.4 million. We have launched the breathing space scheme, which gives a 60-day freedom from fees and payment requests. We are also expanding the availability of affordable credit, providing £96 million of dormant assets funding to Fair4All Finance.

My hon. Friend the Member for Blackpool North and Cleveleys talked about the Australian experience and the opportunity to cut and paste no-interest loan schemes. We have moved ahead with that, and I anticipate that it will move more quickly now. However, I want to be absolutely clear that it works in the UK context and can be scaled up quickly. I would rather it was on solid foundations, but I feel his frustration in my heart too.

I will sum up by reiterating that the Government’s view is that interest-free buy now, pay later has a legitimate role to play in the market, but its rapid growth throws up challenges. I think that consumers recognise that; they find it useful and easy to use. However, we are committed to getting regulation right and protecting consumers. The asymmetry of protections mentioned here needs to be addressed, but we want to do that without limiting the availability and cost of genuinely useful financial products.

We understand that there are concerns, which I have heard this afternoon, about the speed of the regulation. I will do this as quickly as I can, with my officials. We will report back to the House as quickly as possible, but I would welcome colleagues’ continued engagement in the weeks ahead. I recognise the risks that exist in the run-up to Christmas, and I acknowledge the legitimate warnings that the hon. Member for Walthamstow has raised.