Before we begin, I remind Members that they are expected to wear face coverings when not speaking, in line with current Government guidance and that of the House of Commons Commission. Members are asked by the House to have a covid lateral flow test twice a week if coming on to the parliamentary estate, either at home or at the testing centre in the House. Will Members please also give each other and members of staff sufficient space when seated and when entering and leaving the room? I would also like to remind the Committee that today there was a mass for Sir David Amess, who was a distinguished member of the Panel of Chairs; he is much missed. I call Stella Creasy.
That this House has considered promotion and regulation of financial products on Black Friday.
It is a pleasure to serve under your chairmanship today, Mr Robertson. May I associate myself with your comments? I had the honour and pleasure of taking part in debates chaired by Sir David. He was always a fair and very fun Chair to have around; we shall miss him terribly.
I want to be clear from the start that I do not think that anybody in this room is green—green in the sense of being the Grinch. This is not a debate about whether people should be able to spend money, which is a personal decision. As we come up to Christmas, it is important to recognise that for many families this year will be an extra special one, given what we have been through over the past two years. I recognise that it is very easy, when we talk about consumer credit, to sound like the Grinch, as though we are saying it is all so complicated and difficult and that nobody should spend any money. Let me be clear that it is not my intention to come without good Christmas cheer.
Indeed, I note that many retailers are taking advantage to promote the idea that this is the year that one should really indulge and go all out. Tesco tells us, “Don’t stop me now,” when it comes to shopping. Argos tells us, “Baubles to last year,” and Debenham’s says, “Christmas like never before.” Aldi tells us not to be a Scrooge—at least, I think that is what they are telling us with the Christmas carrot. Sports Direct is more direct than ever, telling consumers to “Go all out!”
My point is more simple. We want families to be able to celebrate with their families and not be worried. One thing we know that causes the most worry to families is money. We are a nation that has not done as well in the G7 as some others, but we are second highest among the G7 countries for household debt. That is one competition we do not want to win as a nation—but we do. We have always been more comfortable with borrowing and credit than other nations.
I thank my hon. Friend for giving way. I place on record her excellent background in holding to account Wonga and a number of other loan sharks through other Parliaments, as well as work on other topics she is well known for. This issue is particularly important right now, as we come out of coronavirus. Is my hon. Friend aware that Citizens Advice found that 40% of buy now, pay later customers have been unable to pay for essentials such as food, rent or bills? This is a particularly difficult time as people come back into work, with the insecurity of work underlined in many of our workplaces, and bills—particularly fuel bills—going through the roof.
My hon. Friend is absolutely right. If both Scrooge and the Grinch are misunderstood, I very much believe that buy now, pay later companies could become the true villains of Christmas rather than them —[Interruption.] It might be tenuous, Minister, but it is a link.
I recognise that during the pandemic, debt has become a lot worse for many people; when I say a lot worse, I mean it is less likely that they will ever be able to get out of it. Many people live with debt, and while sometimes it is a debt they can manage, an awful lot of people are drowning, not waving.
Data from StepChange is clear that as a consequence of the coronavirus lockdown period, 2.8 million people have fallen into arrears: most frequently on utilities, as my hon. Friend the Member for Hornsey and Wood Green (Catherine West) said. That is on fuel and water, on keeping the basics of the house going. Some 820,000 people have fallen into arrears on their council tax—a debt to the public sector—and about 500,000 people have fallen into arrears on their rent. We have seen a massive explosion in the number of people who will never own their own homes and will always be in the rental sector, particularly in areas where the cost of living is particularly high. My constituency has the 10th highest level of child poverty in the country, and that is because of the cost of living and the cost of renting in my local community. We know that those people, who have struggled to stay in our area, were particularly hit by the restrictions on their working practices in lockdown and have now found that they simply cannot afford the roof over their heads.
Little wonder that nearly 4 million of us have borrowed to make ends meet during the lockdown period, with 1.7 million often using a credit card, 1.6 million using an overdraft and nearly 1 million using a high-cost credit product. That borrowing is not, perhaps, the stereotype of borrowing in order to buy goods—going back to my original point about people wanting to treat a family member. Instead, people have borrowed during lockdown to keep things going: to keep food on the table; to keep their car working, so that when they can go to work, they can get to work; and, perhaps, to pay for heating, especially in the cold weather.
I congratulate my hon. Friend on all the work that she has done on this issue, as mentioned by my hon. Friend the Member for Hornsey and Wood Green (Catherine West). Let me pick up on the point my hon. Friend the Member for Walthamstow (Stella Creasy) is making very powerfully about people who get into debt and feel pressured into buying things for their family and friends, especially because this is the first time for a while that they can celebrate Christmas properly with family. Recent research by Citizens Advice, which I have seen, found that 39% of people who have opted to buy now, pay later online did so without realising that they were signing up to a high-interest loan. That lack of transparency is very concerning to me. Does she agree that with pressure on our constituents to make purchases online before the products are likely to rise in cost before Christmas, the Government should set out what they will do in the coming days and weeks to make sure that people know exactly what they are signing up for when they take out a buy now, pay later product?
My hon. Friend makes her point incredibly well and she will not be surprised to learn that, yes, I absolutely agree with her. Indeed, it is striking that just before the pandemic hit we had the first year in this country when more purchases were made online than in bricks-and-mortar shops, and of course during the pandemic people’s switch to shopping online has become even starker. The state of our high streets is a debate for another time, but we have all seen that change and I do not think that it will go backwards. People’s comfort with shopping online had already been set in place before the pandemic hit; now, for most people, that is the first place that they look, rather than the last.
In 2020, 9 million people were forced to increase their borrowing to cope with the pandemic. That is a phenomenal statistic. The press and media have been full of people paying down their debts, and the silent minority of people for whom debt has increased have not been heard. Today’s debate is about that group of people, and what support and advice we are giving them, because, as my hon. Friend the Member for Hampstead and Kilburn (Tulip Siddiq) said, being able to treat our family members, especially when we have been through such tough times, becomes even more important for everyone. That means that we must ensure that everybody can access credit in a fair and affordable way.
My argument with the Minister today—he will know it, because we have been having it for many years—is about what more we can do to ensure that there is a fair and level playing field, that consumers are armed with the best information and that companies cannot exploit the situation in which there are so many people in our communities who are drowning in debt and will never get out of it. They will always live with a level of debt that might be exacerbated so that one single thing can tip them over into a financial crisis, as opposed to just a financial meltdown, which is what they might be in right now without realising it. Indeed, many of us may have had the experience of talking to people in our constituencies who say, “Well, I don’t have any debt”, and then we ask them if they have a credit card and they say, “Yes, of course”, as if a credit card is not debt.
My hon. Friend is making an excellent argument. Does she agree that the quality of financial education in the UK is not what it should be? The 60% to 70% increase in debt from these sort of products would primarily affect a younger age group to begin with, because of their propensity to use the internet. Does she agree that much more needs to be done on financial education, hopefully led by the Treasury and spread across the appropriate level of education online?
My hon. Friend makes an important point about financial education. I am pleased to see it is now part of the curriculum. She is also right that a cohort of people who did not have financial education are absolutely at the forefront of using this form of credit. Half of all online shoppers aged 24 to 35 have used buy now, pay later. What is challenging is how often they are using it.
If people think that this is about a one-off purchase of a pair of shoes, a dress for a special occasion, or Christmas presents, looking at the one in 20 consumers who use it more than once a week should make us worry about what it is about their finances that means they need to spread payments because they cannot afford to make a payment in a week. Some 35% of consumers aged 18 to 35 report using buy now, pay later more than once a week.
Buy now, pay later is a game-changer in how debt is being created, generated, and maintained in our economy, but it is going under the radar. Little wonder that two-thirds of merchants are using this form of credit. It is now in over 20,000 major brands in the UK including Marks & Spencer, Pennies, Halfords, Asos, PrettyLittleThing, and I SAW IT FIRST.
Klarna was valued at £46 billion as a business in the last investment round—I believe that is more than several of our public services—and claims to have 13 million customers in the UK. That is across every single one of our constituencies, but disproportionately in the poorer constituencies where people are struggling, and people are being targeted.
Citizens Advice reports that 41% of buy now, pay later users have struggled to make a repayment, one in 10 have been chased by debt collectors, rising to one in eight for young people and 25% have fallen behind on another household bill in order to pay a buy now, pay later bill. It does not take a rocket scientist to work out that if there are debt collection agencies at the door, a person is probably going to pay them before their council tax, but we know the consequences that can have.
It is a pleasure to serve under your chairmanship, Mr Robertson. I congratulate the hon. Member for Walthamstow (Stella Creasy) on securing the debate, and I congratulate Pip on taking the sensible decision to fall asleep during his mother’s speech. He had a nice long sleep, as we can all observe, which was perhaps a sensible decision by him. None the less, we heard a powerful contribution from the hon. Lady, most of which I strongly agree with. She clearly set out for us some of the challenges that we now face.
I of course welcome the fact that the Government are looking to regulate the buy now, pay later sector through the Financial Conduct Authority. I am pleased to see so many buy now, pay later companies falling over themselves, begging to be regulated—“Regulate us, please!”—but they might not be quite so happy when we get to see the detail. That will be the test of the buy now, pay later sector: not its good intentions now, but what it makes of the regulations at the end of the process.
I am concerned that the consultation fails to capture the true nature of the consumer detriment, focusing only on the absolute value of the goods but failing to capture how the market is changing with this type of credit. That is strange, given the wider policy environment. It was the Woolard review that first took us down the path of regulating buy now, pay later, but it had much more to say about improving access to lower-cost, short-term credit for the more financially vulnerable. Both issues need addressing in parallel, not separately, and I see no evidence—I might be wrong—that the Government are adequately progressing the wider agenda of the Woolard review on improving access to low-cost, short-term credit.
I know that some people out there believe that the BNPL type of product should be banished out of existence and is a fundamental evil that drives demand for fast fashion. It is a very easy target to strike. However, I represent a relatively deprived part of the country and believe that my constituents should not be denied access to the short-term, low-cost credit that more affluent constituents take for granted. That should not be one more example of the poverty premium that people face in their daily lives. At the moment, the least well-off are disproportionately penalised by the poverty premium, which sees them subjected to higher insurance premiums and offered a much smaller range of affordable credit products, if any at all exist for their particular financial circumstances.
It is a pleasure to serve with you in the Chair, Mr Robertson. I thank the hon. Member for Walthamstow (Stella Creasy) very much for introducing the debate, and I congratulate her on having not only a genuinely good track record of action on consumer protection, but much better behaved infants than I have ever had, which is not to be sniffed at.
I associate myself with many of the remarks and proposals that the hon. Member and others have made, including about understanding that individuals and families are ready for a meaningful Christmas, and acknowledging that many are able to make, and are facilitated in making, difficult choices and balancing things this year and every year. However, we also have to acknowledge that Black Friday and the associated financing is not a generous offer and an attempt by retailers and financiers to make Christmas dreams come true. It is, in many ways, exploitation of those natural human instincts to try to provide for family. Black Friday is no longer just one day in November; it is a month-long—and often longer—bombardment of advertisements, deals and “ways to pay” that go far beyond traditional methods.
Research published today by Which? indicates that some 99% of Black Friday deals that it assessed were in fact available cheaper elsewhere in the calendar year. At the heart of this is driving people to make more purchases. We could spend this debate talking about the negative impacts of Black Friday alone on people, on the planet and on smaller retailers, which perhaps do not have the same marketing infrastructure as larger ones, but probably the most acute impact, as the hon. Member for Walthamstow outlined, is the results and the risks of predatory lending.
Citizens Advice has likened buy now, pay later to quicksand—easy to slip into and very, very difficult to get out of. As I said, at the heart of the concept is encouraging people to spend money that they do not have by putting the hard landing of any purchase on the long finger. The hon. Member for Walthamstow is correct to highlight the habit-forming tactics that mainstream this means of purchase and steepen the slippery slope by which many people slide into debt. She highlights the very interesting statistic that it increases sales by up to 30%. Evidence bears out the concerns that Members have expressed, with 75% of buy now, pay later users being under the age of 36—this tactic is clearly marketed particularly at Gen Z—and four out of 10 of them struggling to repay. That matches what we already know about the financial security of many in that demographic, who are already in or at risk from the gig economy, with its inadequate and unsustainable or unfixed incomes.
I begin by paying tribute to the hon. Member for Walthamstow (Stella Creasy) for bringing the debate and for all her work in this area. As the Christmas shopping season gets fully under way, it is right that we debate debt, how consumers require protection in a fully regulated credit market, and the responsibility of Government to ensure that that is the case. The high cost of some credit options, especially buy now, pay later deals, is already causing untold misery for millions of consumers. So far this year, shoppers have racked up more than £4 billion of outstanding debt, averaging £538 for each user. Research shows that 10% of shoppers plan to use buy now, pay later options this Christmas. I am sure that option can be helpful for some people, to spread the cost of significant purchases, but it can also facilitate the building of unsustainable debt.
In order to protect consumers, the sector needs to be properly regulated. An exemption in the law as its stands means that these payment plans are not treated in the same way as traditional credit agreements, so they are not regulated by the Financial Conduct Authority. Therefore, as the Woolard review found earlier this year, many consumers do not see buy now, pay later options as a form of credit, so they do not consider arrangements as carefully as they might otherwise do. It is worth noting that the sector was comparatively small, but the value of transactions nearly quadrupled between January and December last year, to £2.7 billion. It is easy to understand why the Woolard review concluded that there is an urgent need to regulate all these products.
The Government’s consultation into the regulation of the buy now, pay later market will close in January. It must result in robust regulation of the sector, which must be brought into line with the regulation of other areas of the credit market, with interest at least no higher than that for pay-day loans, credit cards or overdrafts. It should also require credit checks similar to those for other credit products. It is appropriate to think about such things as we approach Black Friday and Cyber Monday, which is the commercial answer online to in-store shopping.
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.
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My point in calling the debate on Black Friday and the run-up to Christmas is to recognise that this is a time when for many families getting into debt seems the right thing to do, because it is about being able to treat loved ones. When we have had so little time with our loved ones and been so apart—I hope we can be together this year—being able to do that feels even more important. As a result, the risks that families face are even higher.
I recognise that the Minister cares passionately about the subject and has done a lot of work on it. My call is about how we will help those families have a good Christmas, so that the new year is not a time of further worry and distress caused by debt. The honest truth is that as much as people talk about the pandemic as a time when some families have paid down debt and saved money, since they have not been able to go on expensive foreign holidays, for many others it has been a time of further financial distress. I used the word “further” critically, because we are a nation that has a problem with household debt, and has had that for some time prior to the pandemic.
Prior to the pandemic, Experian found that 40% of people would not be able to pay their mortgage or rent if it increased by £50 or more a month. Just an extra £50 and they were sunk. A total of 10% of this nation was constantly overdrawn, and that figure has remained pretty stable for many years. As many as 2.8 million people have persistent credit card debt, which means that they are paying more in interest fees and charges than in paying off the debt.
For some people in this nation, saving is a habit, while for others it will always be an ambition. Some 34% of adults have never had any savings or have savings of less than £1,000. There were many people in this country who were struggling financially before the pandemic. What the pandemic has done for that group of people—people for whom a foreign holiday was never a possibility —is throw into sharp relief just how difficult their finances were. Many of those are in precarious jobs, such as in retail or hospitality, and they were hit even harder when the pandemic came.
It is striking that there has been a 267% increase in the number of consumer county court judgments issued. Those numbers were depressed by the covid forbearance measures. I recognise that schemes such as the furlough scheme and the self-employment income support scheme helped to mitigate the impact of that. My point when talking about consumer debt and consumer credit is that we are coming out of a period when many people were vulnerable anyway because of long-standing household debts, and that those debts have been made a lot worse. Add into the mix the fact that we expect those people to spend money and help to get our economy back on track. It does not take a rocket scientist to recognise that at the heart of that mix is something very potent that could lead to real poverty and destitution for many people.
My hon. Friends the Members for Hornsey and Wood Green and for Hampstead and Kilburn are right to prefigure the particular type of debt that I am concerned about. The Minister knows that I am concerned about it and I know that he agrees with me that there is a problem with this type of credit, which needs to be regulated. My point today about the buy now, pay later industry is that there are echoes of previous examples in our communities where new, or relatively new, forms of credit that might have seemed niche when they first came to the UK market explode very quickly, become commonplace among millions of people and, without proper regulation or scrutiny, cause many more people to get into debt as a result. We saw that with the payday lending industry, which exploded in the UK in the early 2010s, and the honest truth is that it took politicians from all sides too long to recognise just how much damage could be done by a high-interest loan.
Those in the buy now, pay later industry will say that they are not a payday loan. Indeed, they are not—they are not capped, for a start, which is one of the things that helps to protect people from getting into debt through a payday loan. Buy now, pay later companies will say that they do not charge interest to consumers, so we should not view them in the same way as payday lenders—that this is apples and oranges. But both types of high-cost credit—they are high-cost credit, because they come with late fees if people do not pay them back on time—share a similar marketing tactic, which is about forming a habit. It is about getting people to see them as the main way to make ends meet; the main way for people to deal with having too much month at the end of their money.
Whereas the payday lender said, “We’ll give you a short-term loan and you’ll pay it back very quickly, and you’ll never notice, and it will just tide you over”, the buy now, pay later companies say, “Spread the cost. It will make it much more manageable, and you will be able to get the things that you need at the time that you want to.” Let me be very clear that for some people, there may well be a perfectly reasonable use of buy now, pay later, in the same way that for some people there is a perfectly reasonable use of a payday loan. The problem is that for many people buy now, pay later is a form of credit that they cannot afford, because they cannot afford the goods in the first place.
Experian data shows us that 30% of people using buy now, pay later say they use it for items that they otherwise could not afford, and in an environment where inflation might top 4%, where wages have struggled to keep up and where we have a cost-of-living crisis, that is pouring fuel on to the fire for many people and the debt problems that they face.
For those who may not be familiar with buy now, pay later, it is a simple premise. The payments are spread over a number of weeks or months with these companies, and there are variations of the same model. What does that mean for a consumer in practice? A £100 pair of trainers will, perhaps, suddenly become £25 at the point of sale, because the £75 will be paid off at later points throughout the year to recoup the cost. Crucially, the consumer is not officially paying the fees, because the retailer pays to use the service, although one innovation we have noticed in the market in the last year alone has been the move to be able to allow the company to have a direct relationship with the consumers. What they call a one-time card can be created and purchased from a website without the retailer ever being involved. That in itself is problematic, because it prompts the question of how they are deciding what someone can afford to pay.
Let us stick with the original business model. How these companies make their money is very simple. When a £100 pair of trainers suddenly looks as if it only costs £25, people think, “Well, I might buy the trousers and jacket to go with it, because I thought I was going to spend £100 today, and I’m only spending £25”. On average, consumers spend 20% to 30% more when they can spread the payments. For the retailers, it is worth paying the fees of these companies, because people will spend more and they will get more purchases from them.
Many retailers are very up front about that. It is a massive part of their forthcoming business strategy, particularly in relation to Black Friday and Christmas, to encourage consumers to use buy now, pay later because they will end up spending more than they would have done if they had used another form of credit. I reiterate: for some people, that may be perfectly reasonable. They are spending future money, but they have that future money, so it is an acceptable way to do it. They can splash out this Christmas knowing that pay packets in January, February and March will cover the cost. However, a large group of people is spending money that they simply do not have and getting into debt. As my hon. Friends the Members for Hornsey and Wood Green and for Hampstead and Kilburn have pointed out, because this is a new form of credit, many people do not realise it is a form of credit and what can happen if they do not pay back. The late fees, the credit checking, the credit reference agencies and the debt collection agencies are all part of the mix and experience of using these companies.
In the pandemic, spending on buy now, pay later has gone up 60% to 70%. For some age groups in this country now, buy now, pay later is used more than credit cards. It is a revolution in how we use credit in this country and it has gone relatively unnoticed, except by those who cannot afford to pay and have ended up with a big hole.
Time and time again, studies show that people do not realise what they are signing up for. Forty per cent. say that they used it without realising; 42% did not realise what they were signing up for; 26% regretted it. One in four people regretted using buy now, pay later because of the problems it created. As a consequence, many are generating late repayment fees.
The Financial Conduct Authority agrees. In January, the Woolard review called for the industry to be regulated as a matter of urgency. That regulation is critical. One of the things that most consumers do not realise is that, unlike any other form of credit, including a payday loan, there is no regulation of the buy now, pay later companies. In layman’s terms, if someone gets into difficulty, they can only appeal to the companies themselves to treat them fairly—and good luck with that. They cannot appeal to the Financial Ombudsman Service as can be done with a payday loan or a credit card.
There are many particular problems that need to be sorted out by regulation. First, there is conflict of interest. Many of these companies will tell you that they do credit checks. After all, they say, they do not want to lend to people who cannot afford to repay them. However, their definition of repayment is open to interpretation, just as it is for payday lenders. One of the things that worries me when I talk to the companies, which I have done substantially, is that they will let someone miss a payment, make a payment, and then continue to lend to them. They will let someone express behaviour showing that they have a problem with debt, and then carry on lending to them. As the companies rely on merchant fees, it is not about the consumer for them. It is all about the retailer, all about what they can get out of the retailer, and the retailer wants that 20% to 30% more in interest.
It is also about overspending. As I have said, there is 40% more spending—of course that means that consumers will spend more than they can afford. However, it also means that they can get multiple buy now, pay later loans, just as we saw with payday lenders—people going from company to company. Many people are not just going to Klarna, but also to Laybuy, Clearpay, and the buy now, pay later schemes that retailers have themselves. It is meaningless to suggest that they are doing soft credit checks, because they would not know who else had lent to an individual. They would not know if that person had £500 worth of debt with Klarna as well as £50 debt with Laybuy to inform whether they should be able to take out another £200 of debt with Clearpay.
Crucially, the fact that they are not required to report means that there is no clear assessment for affordability; they decide what a person can pay, rather than applying consistent affordability criteria. That is a particular concern of mine as we have seen this industry evolve so quickly over the past year, and we have seen banks start to offer buy now, pay later. The very people who manage our money are deciding how much of it we can pay out and how much they can then charge fees on. It could be argued that that is like an overdraft, but at least with an overdraft we know that it is one, and consumers can be aware of that. I would wager that people are much more aware of the risks of an overdraft than they are of buy now, pay later.
Little wonder that there was a call earlier this year for urgent regulation. That is why today I am asking the Minister what he is going to do, because we have not yet had that regulation. It is welcome that the consultation on what that regulation should be has been published, but it was only published this month. We have had eight or nine months now of those companies knowing that regulation is coming, but with no clarity as to what that regulation might be, or, crucially, when it might be enacted. Little wonder that many consumer groups are very worried.
A Which? investigation in October found that of 111 major retailers of fashion, baby and child and homewares, 62 offered at least one buy now, pay later scheme, and the majority did not provide any information about late fees. This afternoon I was looking at various websites to see what information these companies provide about the risks of the debt that people could get into—the sort of information that we would expect as standard from regulated companies. Very few provide that information.
We are still seeing the influx of advertising from these companies—we cannot avoid it—pressing and pushing buy now, pay later. Now it is linked to Black Friday, which is a relatively recent concept in the UK, but we are very keen on it and account for 10% of all global Black Friday searches. We are a nation who want to know whether we are going to get a good deal and when it will happen. It is a toxic mix, and one that we must address urgently.
It is right to consult on what the regulations should be, and I hope the Minister will confirm that it is crucial to regulate these companies as we regulate others. First, it is a form of credit, so why should these firms not have the special affordability rules that we ask of other companies? Secondly, if we start picking off various types of credit and offering them different types of regulation, we will quickly undo the regulation that we have and see a race to the bottom, rather than the standards that we all want for our constituents. He must also recognise that the length of time that it has taken to get to regulation has offered these companies an open goal, and it is one that they have taken through the evolution of offering immediate credit cards themselves direct to consumers to make purchases—Amazon may say that it does not accept Klarna, but people can use the Klarna app to buy from Amazon—and in the types of products that can be bought using buy now, pay later. Betting sites now offer buy now, pay later options. Food sites offer buy now, pay later. Zilch can be used to buy a Domino’s pizza.
Think about that for a moment. Spreading the cost of a pizza over months tells us something about the cost of living crisis and how desperate people must be if they have to spread payments for a pizza. This is not about buying fancy tellies any more; we are back in the territory that we got into with payday lending, where people use this form of credit to make ends meet because they have got too much month at the end of their money.
The Minister will say that a consultation is ongoing, but it closes after Christmas, so it is too late for Christmas this year. In this environment, it would be helpful to hear that he recognises the risk of Christmas. We know that one pound in every four spent last Christmas was on buy now, pay later, and it will be a lot more this year, so the risk of people getting into the difficulties that the CAB and Which? outlined so well is even higher. What will he do to warn people that such credit is unregulated, so they do not have the consumer protection that they might expect from other forms of credit? What is he doing to hold to account those retailers telling us to go out, spend money and treat our dearest and loved ones while creating websites on which it is practically impossible not to get into using buy now, pay later as the default option? What is he doing to ensure that advertising is clear about the risks of the debt that people could get into? When people look at the JD Sports site, which has six different options for buy now, pay later, they need to understand that all those options come with a higher risk than other forms of credit because they are not regulated.
The Minister will say that the Government want to make good legislation, and I agree, but he must take responsibility for the length of time it is taking to regulate these companies, because they have evolved and are exploiting people at the same speed at which the payday lending industry moved to exploit people. The problem with leaving these legal loan sharks to prey on our communities is that we will all pay the cost at a later date. We will all pay the cost when Government is slow and FinTech is quick, yet that is the situation that we are in.
Will the Minister join me in calling on responsible retailers to rejig their websites so that buy now, pay later is not the default option but one that comes with a severe financial health warning? Will he join me in asking major transport agencies not to take these companies’ adverts until their costs are clear and they admit that when they say, “No late repayment fees; no charges,” that will not necessarily be true? Will he set out a clear timetable for when he expects that the regulations will come in and these companies will have to abide by common rules on affordability and credit checking and treat our constituents fairly?
I am really worried about this Christmas and how many people will get into debt trying to do the completely understandable thing of not being the Grinch. However, I am even more worried about the message that we are sending. Just as Wonga came along and then came Klarna, so another FinTech will come in the future. Every single time we pause—every single time we as a nation say, “Well, there might be unintended consequences if we don’t act”—we are offering up our indebted constituents as guinea pigs for these industries, and I know that is not what the Minister wants to do. We have to be as quick as them, if not quicker, in recognising the risk and stamping down on it.
I hope the Minister understands where I am coming from and why I believe it is so important that Parliament sends the message that Black Friday should be a time when we are all very aware of our finances as well as the deals that we are offered. We should be warning everybody about buy now, pay later. I hope the Minister will agree that we have to get much quicker at dealing with these risks, for the benefit of all our constituents.
That is my first reservation about the consultation: it views the consumer detriment as relatively small because of the low value of the goods overall. We know that, on average, low-income families have only £95 in savings, so even a single late payment fee can have a devastating impact on a household’s financial circumstances. We need to view these financial transactions in the same way as we see credit cards, loans or mortgages. The last time I had to remortgage, a few years ago, it was a six-hour epic, as every single line of my expenditure was gone through in great detail and I had to justify virtually everything that I spent.
It is the percentage of someone’s disposable income, not the overall amount, that matters when making such decisions, and assessing affordability must be based on maximum transparency between the buy now, pay later provider and the customer, but also between providers. As the hon. Lady said, people cannot rack up multiple debts with Klarna, Laybuy, Clearpay and all the other new companies that are coming on the market. We need to move the focus to the behaviour of the borrower over the lifetime of their financial activities, looking at all their borrowing rather than having just a single test for their credit risk or a single affordability assessment in isolation. It cannot just be a credit check that, if they fail, makes their ability to obtain credit in the future that bit harder, because that is the opposite of putting them on a pathway to more affordable credit. People might be able to afford a loan at a particular point in time but then be hit by a family bereavement that changes their financial situation. Allowing lenders to see a wider picture of spending habits requires much speedier progress on open banking than we have seen so far.
I am also interested in examining the future of the sector. The consultation on regulation cannot just meet the market as we see it at the moment; it must meet the market that we will see in years to come. Consider the issue of rent to own, on which both I and the hon. Member for Walthamstow attended debates well before 2015. That sector went on a long journey, from the relatively innocuous ubiquity of Radio Rentals, which many of our parents used to buy their first TVs back in the late ’70s, to the more problematic practices of BrightHouse and PerfectHome in the 21st century. We know where that journey ended. I still walk past the boarded-up BrightHouse shop on Abingdon Street in the centre of Blackpool, which I named the most dangerous place in Blackpool because it was sucking people in and trapping them in long loans of high-cost credit.
We are already hearing that buy now, pay later is being used not just for pizza but for the weekly food shop. That should really give us pause for thought. Higher-value goods are now being bought through buy now, pay later. It is not just fashion, which we automatically link with Klarna and the advertising that we see. I read in the paper just this week about a new market entrant, humm, from Australia, that specialises in much larger consumer goods—something that makes me go “humm” when I wonder whether that is desirable.
We must also think more about the retailers, as the hon. Member for Walthamstow said. They are as much the beneficiaries of this market as are the buy now, pay later providers themselves. The whole business model works only if it increases sales for the retailers; otherwise, why would they bother paying the buy now, pay later provider a percentage fee? That fee is what justifies this form of market.
If that becomes our default payment mechanism in a cashless society—which I am afraid that, as we debate here, we seem to be sleepwalking into—we may need to look again at how we monitor the internet shopping experience and the customer journey through a website. Will regulations that were framed around the idea of purchasing clothing work for goods that could cost thousands—much larger consumer goods and consumer electronics? Where do the retailers sit in all of this? There is a real commercial dynamic at work here.
I was speaking to ASOS just last night, at a reception in the Churchill Room. They said that they had worked with Alice Tapper of GoFundMe, a noted campaigner whom I am sure the hon. Member for Walthamstow has spoken with at length. She has worked with ASOS to redesign its website to ensure that it is a friction-filled—not frictionless—journey for the consumer, so that there are multiple occasions when consumers are asked to pause and consider what they are about to purchase, and so that buy now, pay later is not the default, pre-ticked option on the checkout form. Those are all very simple measures, but they are not measures that the Treasury can effect. They come under the Advertising Standards Authority and other types of regulation. The consultation on regulation will not solve everything; there are other agencies that have to take other steps.
None the less, there are better solutions out there, and the Government are committed to them—not least no-interest loans. I am at risk of reading out a paragraph from my previous speech, when the Minister was here and I did not get an answer, so let me have another go, if he is listening. I am obsessed with reforming local welfare assistance schemes so that people can access the white goods that they need. The Government have a very good idea: no-interest loans. Providing those should not be rocket science. The original idea came from Australia—the same place from where humm is now arriving on our shores, and where Good Shepherd Australia has been operating micro-finance for many years. Surely, to introduce them here must be cut-and-paste. Indeed, some of their regulations on buy now, pay later are a model of what we are planning to do here. Rather than building a programme from scratch, why not try to move faster by looking at what works in other jurisdictions? This matters, because the cost of replacing white goods is terrible for so many families, who fall into debt as a consequence. We need only listen to the Liverpool-based End Furniture Poverty campaign and look at the pilot schemes that Fair4All Finance is launching to tackle the concept of appliance poverty.
The hon. Member for Walthamstow also mentioned FinTech, perhaps in the sense that it is almost a risk that you never know what it will come up with next. Equally, I think that FinTech is actually part of the potential solution. There are companies out there and emerging—Auden Financial is one that I happen to know quite well—that are looking to use FinTech to provide the low-cost, short-term, ethical credit that I think has to be the end goal. We all talk in this place about FinTech. We all swoon, almost, at the wonderful thought of what a fantastic business it is. I am not sure that we as politicians always understand it terribly well, but we need to keep asking how we can work with that sector so that it does good and not bad.
There will always be disruptors, and I want to disrupt the business of high-cost, short-term credit; that is what I want to disrupt. There is a gap in the market for a new provider to come along and do things differently. No one should be denied the opportunity to own things. Everyone should have the ability to choose how they spend their money and to choose how they access a form of credit that is regarded as affordable to them and does not place them in greater difficulty. At the moment we are not in that position, but there are multiple ideas out there. Restricting access to buy now, pay later, properly regulating it, and treating it like any other form of credit and not least in a way comparable to how we treat consumer detriment from credit cards, has to be one step along the path. There is a much wider agenda that the Treasury needs to embark on to embrace the whole Woolard review, not just one small paragraph.
I commend what the Minister is doing. Like the hon. Member for Walthamstow, I know that he is on the side of the angels. But it is the job of those on the Back Benches to say, “Go further; go faster. Do it yesterday.”
The services we are discussing are, in many cases, clearly harmful to the individual consumer, but also to the planet. Members outlined that the vast majority of buy now, pay later purchases relate to clothing, which drives the acutely unsustainable fast fashion market in which literally tonnes of clothing, often produced in dubious labour conditions, quickly ends up in landfill after a tiny number of wears—the product is often designed to be worn a small number of times. There is a wider impact. Fashion website Boohoo offers shoppers five different ways to pay for a £30 dress, which again underlines that this is not about facilitating a special Christmas purchase or a big purchase, such as a TV, that a household needs; this is about driving a pattern of spending that locks people into unsustainable purchasing habits.
As one investor in a buy now, pay later start-up explained:
“It increases the basket size and it also reduces dropped baskets”.
Some of that is marketing; it is what business does. It is the logical extension and development of the economy we have. However, as in many other areas of the market and the economy, we have an obligation to try to protect people from technologies and marketing techniques that are far beyond what any of us are used to.
This is a big and emerging problem and, like a lot that relates to technology and online, the market may be moving faster than regulation can, but it is not an unsolvable problem. The hon. Member for Walthamstow outlined many ways, alongside FCA regulation, to intervene and slow this down, including obligations on retailers to adequately display and explain the background of the products they serve. For example, in Sweden, the home of Klarna, it is already illegal to market buy now, pay later ahead of other types of up-front payment.
It is welcome that the Government acknowledge this issue and that regulation is required. It is important that we have forums such as this one to correct the view that this is not a widespread consumer problem, because it is. We know very well the depth of the debt problem. After all, credit is debt—that is what it is. As others have explained, people will always want to use credit, but in many cases it will be for a long-term purchase that will have benefits in life. In the vast majority of buy now, pay later cases, that does not apply. I support the motion and all efforts to regulate and protect.
Recent research by the consumer organisation Which? is very worrying. It reveals that a strikingly high number of shoppers feel rushed into making Black Friday purchases. Many live to regret it, using credit or borrowing to make purchases that they could otherwise not afford. That must be seen against the background of the way that Black Friday is marketed, using the threat of regret, with banners such as “Hurry!”, “Don’t miss out!” and “Last chance!” plastered around these so-called deals. Shoppers who buy on credit pay extra for their purchases, regardless of how good the deal might look, once the extra cost of credit is factored in, which can build from month to month.
It is also worth noting that the seductive techniques used to encourage shoppers to splurge on Black Friday belie the fact that Black Friday deals are not always the best of the year. In fact, many products can be found cheaper in the months before and after November. According to Which?, that is all hidden behind the marketing used for Black Friday.
As we approach Christmas and talk about debt, there are some who say—and I have heard them—that people should live within their means. It is easy for those who are relatively well off to lecture those who do not have very much about living within their means. It is completely understandable that people, despite being financially pressured, still want to buy presents for their children at Christmas—of course they do. If they do, the Government have a duty to ensure that all consumers are buying in a fully regulated credit market, with all the protection they need, should they find themselves overwhelmed with debt. The Government have a duty to ensure that all aspects of the credit market are fully regulated and fit for purpose.
I need to say at this juncture that many families are not forced into debt because of Christmas shopping, but because their everyday household budgets are being squeezed more tightly every single day. We must not assume that unsustainable debt is down to non-essential purchases. Many households are falling into debt in order to pay for essentials, such as the gas bill or groceries. That applies not just to those who are unemployed but to that shameful phenomenon: the working poor. Those are people who go out to work every day to provide for their families but simply do not earn enough to make ends meet and pay for essentials, having been met with a cut of more than £1,000 a year in universal credit.
We are sitting on a debt time bomb, and it is not due to profligacy; it is because so many people have suffered an income shock through no fault of their own. Sadly, for those people, the idea of levelling up sounds very hollow as they face the destructive misery of debt, which every day threatens to engulf them. The cost of living is rising, and that is throwing many people into hardship, including many people who were always able to manage in the past. The UK household debt crisis is not going away; it is actually getting worse.
The Government must therefore ensure that the buy now, pay later market, which we have heard so much about today, including the difficulties with it, is subject to the robust regulation that consumers have a right to expect. That process must be expedited so that next year, at the next Black Friday, anyone who turns to any kind of credit can do so with much more protection and confidence than they are currently able to. Some people have estimated that the sector may not be properly regulated until as late as 2023. That prospect is deeply concerning, so I hope that the Minister will today commit to expediting regulation as soon as possible and as a matter of priority, so that we can save yet more people from experiencing the severe misery of debt without the protection that they should be entitled to expect.
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.