Black Friday: Financial Products

Pat McFadden Excerpts

Tuesday 23rd November 2021 Westminster Hall

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Robertson, and I begin by endorsing the remarks you made at the beginning of the debate. I attended the funeral mass this morning for Sir David Amess, and you are absolutely right that he is a colleague who will be greatly missed right across the House.

I thank my hon. Friend the Member for Walthamstow (Stella Creasy) for securing this debate. I also thank our youngest member, who has attended the debate and been as good as gold throughout; we will see how we get on for the next 20 minutes.

My hon. Friend has been a formidable campaigner for consumer rights and against high debt charges, particularly for those on modest incomes. We are focused this afternoon on the buy now, pay later sector, which has grown hugely in recent years. The Government consultation on the issue says that the use of that payment mechanism tripled last year, and that during the pandemic more than one in 10 consumers paid for goods in this way. We have heard other numbers in the debate that suggest that the true figure may be even higher. Whatever the exact figure is, I think we can all agree that the sector is growing fast.

During the pandemic and the lockdowns, we saw an accelerated trend towards online shopping, and indeed online everything else, which helped to spur the growth of buy now, pay later products. As for the overall financial impact of the pandemic, it is really a tale of two Britains. For those in good work, who were still being paid full pay, the impact was often the ability to save more money. Right across the country, and across the rest of the developed world, bank deposits increased markedly for that reason. People were still earning, but much normal spending was curtailed, so they had more money to save.

That is the story of one Britain, but there is another Britain in which earnings were cut as work was lost, and where incomes declined and debt grew. For many people in that group, their costs increased because they were stuck at home with the heating on, their food bills went up because children were off school, and they could not earn what they had earned before. Those were families who had never had much disposable income in the first place, and who were often struggling with and juggling significant amounts of debt. Many of those people fell between different Government help schemes and were left under huge financial pressure. It is really important to understand that while overall savings grew, that was not true for everyone, and for many people debt grew instead.

However buy now, pay later products are marketed, they are another form of consumer debt, pure and simple. The explosive growth in this type of debt in recent years, and the risks identified in the report that Chris Woolard wrote last year, mean that it is right that these products are properly regulated. That is in the interests of consumers, who have a right to know exactly how the products work and what the potential penalties for non-payment will be. Otherwise, regulation will fall behind innovation in the market and become hopelessly out of date.

The business model for buy now, pay later is a merchant fee for each purchase. The growth model is that more goods will be sold because payments can be spread over a period of time. Interest is not normally charged on the staggered payments, but that is not the end of the story, because the companies also raise revenue through late payment fees or penalties when consumers fail to meet payments. For some buy now, pay later providers, those late payment fees and penalties are a significant proportion of their overall revenue. We must remember that, in the end, this is a debt like any other, which attracts penalties if it is not paid in accordance with the agreed timescale.

Chris Woolard’s review concluded that the buy now, pay later market

“poses potential harms to consumers and needs to be brought within regulation to both protect consumers and ensure it is sustainable.”

To their credit, the Government acted fast at first, taking an initial power last March during proceedings on the Financial Services Act 2021. Then, after a long period, Ministers issued the consultation on detailed regulations only last month. That consultation is still open and does not close until January. Why was there a delay of seven months or so between the initial legislation and the publication of the consultation? Why is the tone of that consultation quite unenthusiastic about regulating, seeking to minimise the scope of the regulation? It gives the appearance that the Government have been dragged into this. This is a fast-growing market. New accounts are being opened every day, and there is no reason to delay. This delay will mean that significant time has elapsed between the initial decision and the Government’s approval of the Woolard report and introduction of the regulations.

My hon. Friend the Member for Walthamstow has spoken about the potential for the next few weeks to result in significantly more consumer debt, with both Black Friday and Christmas approaching. I endorse what she said: nobody here wants to dampen anyone’s enthusiasm for a bargain—although I caution people to check whether it really is a bargain—and of course, we want everyone to enjoy the festive season. In my house, it is pretty big business. We have lights on the inside, we have lights on the outside and, whether I like it or not, we have an awful lot of Michael Bublé. But it is no secret that the festive season can be an expensive time for people and that, for some, December spending can result in a January hangover. That makes this debate both timely and important.

Innovations such as buy now, pay later were not envisaged when the Consumer Credit Act 1974 was passed, and that is why this gap must be filled. When it comes to updating the regulation system, the Government need to act and get on with it. What might the new regulations cover? The slightly reluctantly worded consultation gave some clues, but there are obvious areas, and I want to name a few. The first is information to the borrower. Does the borrower understand that this is a debt, and that they may be subject to penalty charges and increased costs if payments are not kept up? As we have heard, that is often not made clear.

What is to stop consumers setting up multiple buy now, pay later products with multiple companies? How will one know about the other? Does the consumer’s bank know about the other products? What if the consumer is already heavily indebted to their bank? That featured in the Woolard review, which implied that about one in 10 buy now, pay later account holders might already be quite significantly indebted to their bank.

What should the rules be on advertising and promotion? As the Minister knows, the weakness of the FCA’s financial promotion rules has already been a factor in the case of London Capital & Finance, which we debated in relation to other legislation recently. How will the regulations ensure that advertisements and promotions convey sufficient information about the nature of the credit agreement being entered into and the risk of incurring debt and penalties? Will consumers be told, for example, that non-payment could result in their debt being transferred to a debt collection agency? That is quite important, and might give people pause for thought when they take out such a product. Also, how do we treat consumers who get into difficulty? Right now, there is a mix of late payment fees and the use of debt collection agencies. Will the regulator codify that properly, given the proportion of revenues that some companies are raising from that activity?

Finally, returning to the timescale, can the Minister ensure that once the consultation closes, there will be no further delays and the FCA will be able to act as soon as possible, whatever the outcomes of that consultation? Given that the Woolard review reported near the beginning of this year, we certainly do not want to roll all the way through next year with no regulation in place. This is a very fast-growing new form of consumer debt. Regulation has not kept up: it must do so, or else it will ossify and become out of date. Time has already been lost this year, and I will close by urging the Minister—I know he wants to help on this issue—to get on with it, so that in relation to these products, consumers have the protection and information that they have a right to expect.