“(1) Section 137C of the Financial Services and Markets Act 2000 shall be amended as follows.
(2) In subsection (1A), substitute
‘one or more specified descriptions of regulated’
for ‘all forms of consumer’.”—
This new clause would extend the responsibility of the FCA to make rules with a view to securing an appropriate degree of protection for borrowers against excessive charges to all forms of consumer credit.
New clause 17—Regulation of buy-now-pay-later firms—
“The Treasury must by regulations make provision for—
(a) buy-now-pay-later credit services, and
(b) other lending services that have non interest-bearing elements
to be regulated by the FCA.”
This new clause would bring the non interest-bearing elements of bring buy-now-pay-later lending and similar services under the regulatory ambit of the FCA.
New clause 22—Cost of credit: FCA assessment—
“In Schedule 6 of the Financial Services and Markets Act 2000 after paragraph 2F(3) insert—
‘(4) When considering the business model, the Financial Conduct Authority must have regard to the interests of consumers, in particular—
(a) the proportion of a firm’s revenues that are to be derived from re-lending, and
(b) whether customers are likely to be charged a total cost of credit in excess of one hundred percent of the amount borrowed both on the basis of the initial credit terms or following relending activities.
(5) Where the Financial Conduct Authority’s assessment concludes that a business model poses a significant risk that customers will be charged a total cost of credit in excess of one hundred percent of the amount borrowed, then the threshold condition will not be met.’”
This new clause would ensure that the Financial Conduct Authority assesses the business models of firms and does not allow excessive relending activity to take place, or for firms to be granted permission if there is a significant risk of customers paying more in interest, fees and charges, than the amount they have borrowed.
It is a pleasure to serve under your chairmanship this afternoon, Dr Huq—all of us who have one of those titles but never really use it probably ought to, not least with our bank managers on issues such as this.
The new clauses we discussed this morning were about when the FCA, having been involved with a company, has let down our constituents, and that is why we pushed new clause 21 to a vote: fundamentally, there are thousands of people in this country, many of them our constituents, who will be denied compensation because the companies that owe them compensation have gone into administration on the FCA’s watch.
These new clauses are about how we can get proper consumer protection so that we do not get into those positions at all, as well as taking on board what we have learned in the past seven years about what actually works to protect consumers, and the reality is that it is capping. Capping the costs of credit has been a very effective, cheap and clear form of regulation, which has benefited industry and consumer alike. These new clauses are about giving the FCA the power to use that evidence to help to protect our consumers, because, sadly, the detriment that made capping payday lending such an effective thing to do is now appearing in many other industries. That speaks to the whack-a-mole challenge that we have with credit in this country.
As I said this morning, the challenge is that the FCA moves very slowly, but this industry—credit in its broadest sense, not just high-cost credit—moves very quickly. We know that what has stopped consumer detriment is being able to cap what these companies can charge, and we know that most of all from the payday lending industry. The payday lending industry still exists in this country, but the reason we have not had people turning up to our surgeries, or seen these companies on our high streets or indeed in our inboxes, is that regulation has meant that people are not being exploited by them in the way that they were. The companies can still operate—those that want to lend to people in a short-term and effective way without exploiting them. However, the point at which people get into debt and cannot get out of it—that business model that was about hooking people in and keeping them paying—has ended, because of the cap.
In this country, if someone takes out a payday loan, they will never pay back more than double what they borrowed, including the interest fees and the charges. That is a really important point in these new clauses, because the whole point was capping not just interest rates, but the whole cost of a loan. As I said earlier, exploitation in the credit industry is like water: it finds the loopholes. These new clauses speak to other forms of loopholes.
We know that capping works, not least from the FCA itself. This week, it has published evidence that its cap on the rent-to-own sector has cut costs in the market by a fifth. Again, there is still a rent-to-own market, so this is not about driving these companies out of business, but about making it a fairer deal for our constituents. If we do not have capping as a measure that we can use across the sectors, rather than only in individual circumstances through statutory regulators—which is what we currently have, since the definition of capping can be applied only to the high-cost-credit industry—the question becomes, what are the alternatives? From what we talked about this morning, it is clear that the redress schemes and affordability schemes simply do not work. If they did, there would not be thousands of people who are still owed money by Wonga, but who will never get that money because Wonga went into administration on the FCA’s watch.
It is clear that, with affordability schemes, there is just too much leeway for the lenders themselves to decide what is affordable. Inevitably, they will decide that somebody can afford to pay them back and will lend to them, leading to that slippery slope of lending and lending to people in order to keep them paying back a little at a time, with the company knowing that it is going to get money back from people. Indeed, lenders themselves say that the affordability criteria are not very clear as a means of dealing with concerns about whether people are being lent to in a bad way, because lenders do not know whether ombudsman complaints will be upheld. These schemes do not work for all concerned.
There is a pressing need to act on these issues now because we know that during covid the FCA has suspended the persistent credit card debt remedies. Members of the Committee might say, “Well, that’s a good thing, isn’t it?” because we are saying that people should not be written to and harassed to pay back credit cards when they are in financial crisis. However, it also means that those people are still racking up interest if that interest was more than double what they borrowed. As I said this morning, a person is better protected in this country if they take out a payday loan—especially in this pandemic—than they are if they use their credit card. At least at some point, the debt on a payday loan will stop, whereas the debt on a credit card can keep going up, and right now the people involved would not necessarily know about it.
Capping recognises the model of exploitation, which is basically that if a lender can keep people giving them a bit of money back, it can keep making money—it can cover its costs and make enough profit to make the process profitable. Capping is easy to enforce: when companies do not apply a cap on payday lending, that breaches the law, and it means we can act. When we can see credit card companies that are charging double—charging thousands of per cent. in interest when the entire cost of a loan is calculated—we can see why capping would make a difference.
When capping was brought in for payday lending, some companies exited the market, but I think the Minister would accept that that was probably the right thing to happen, because those were the companies that were exploiting people. Good, mainstream credit card companies—Barclays or whoever—should not be bothered by a cap or by the ability of the FCA to use capping as a mechanism for regulation, because they should not be hitting that cap in the first place. If they are—for example, when including overdraft rates or some other loans—we have to ask ourselves whether there is a problem with how people are being lent to, rather than whether capping is unacceptable.
If capping is right for payday loans, why is it not right for credit cards such as Aqua? Aqua is owned by Provident. It is a high-cost form of credit. Some people have seen its representatives in their constituencies: they do doorstep lending. We have seen over the past couple of years that when the cap was brought in just on one sector, the companies diversified their products, going into things that were not capped to continue making money from people who are hard up and who would not be lent to by mainstream credit. If we gave the FCA the ability to cap everything, it would send a strong message that companies cannot find these loopholes, which we are seeing them find time and time again.
Capping is also about new entrants to the market, not just the existing common or garden forms of debt we might recognise, such as credit cards. In the past couple of years, a whole range of new products have been brought out in the UK. Financial companies from overseas are coming into our markets and lending to people, and capping would allow us to deal with them. What am I talking about? I am talking about things such as guarantor loans, and I know the Minister shares my concerns about the companies involved. Guarantor loans are where somebody vouches for another person’s ability to pay a loan. That might seem like a very fair thing to do—somebody else can help back a person—and it seems like a stable business model. What these companies do not say, however, is that if loans are not repaid, they will chase both the borrower and the guarantor. They work on the idea of the social shame of having got somebody else into debt, to get money out of both parties.
In my community, the president of the local Royal British Legion was almost made bankrupt by these companies, because he tried to help out a veteran. Any of us looking at that model would think it is not right. Right now, however, if someone takes a guarantor loan, it is not covered by the capping legislation, so companies can charge 49% interest rates and get people into debt. No wonder that complaints to the Financial Ombudsman Service about guarantor loans have quadrupled this year during the pandemic, and 88% of them are successful. I say to the Minister that, just as we saw with payday lending, the FCA’s failure to step in means that the ombudsman has to do so; hence, the ombudsman is the only form of redress.
It is the same with overdraft charges. When companies do not include all costs, the exploitation, like water, goes somewhere else. Companies will use overdraft charges and fees to rack up payments, even if the interest rates seem very low. When colleagues talk to their constituents about these things, they should make sure that they check the fees charges, because that is where companies will make their money. They have recognised that that is where this debate is going.
There is also an issue with the buy now, pay later industry. BNPL is a term that some people might not have seen yet, because it is a very new entrant to the UK market, but, my, what an entrance it has made! It has been one of the industries that has actively flourished during the pandemic, because it is mainly about buying things online. It has a very simple premise: people can spread the cost of their payment over three or six instalments, so that they do not have to find the entire cost of a product at point of sale. Colleagues might have heard of such companies, including Layby and Clearpay; Klarna is probably the most well known. Crucially, however, they are not covered by regulation, and one of the new clauses is designed to deal with that. It is exactly why people such as Martin Lewis are joining me in raising the alarm about such companies, just as we did about payday lending in 2011. They are the new form of exploitation.
These companies market themselves to retailers on the basis that people will spend 45% more than they would have done had they had to find the money up front. For avoidance of doubt, nobody is saying that people should not be able to access credit, but such companies are being used 35% more in the pandemic than they were beforehand. People sitting at home have been heavily marketed to by these companies, and they are using Klarna and company to buy things. Some 27% of those people say they would not have been able to afford the goods up front, so that is why they have used credit. We can therefore see where the problem lies. If someone is relying on their income remaining the same over the six weeks of the payments, and they lose their job in the middle of that period, what do they do? They might have thought that they could afford something by paying in three or six payments, but suddenly they have to do the maths in their head and work out what they owe.
It is not about whether BNPL bears interest. One of the reasons such companies are not regulated right now is that they do not, in theory, charge interest. They make their money from retailers such as ASOS, Marks and Spencer, H&M and so on. If any Members present are not fully listening and are instead on their phones doing some internet shopping, they will see that buy now, pay later is offered as an option in the drop-down window on many different sites. It is very easy to think, “Well, that makes payments more affordable.” That is particularly an issue for younger consumers. Some 54% of 18 to 24-year-olds report using BNPL in the pandemic, and they are also the group most likely to be made redundant or to fail to find a new job.
The hon. Lady is making a very good point. Is she aware that the Young Women’s Trust has suggested that 1.5 million young women have lost income during the pandemic?
Absolutely. We know who such companies are targeting, and they are doing so deliberately. I hate to say this, as I do want to win over the Committee, but we might not be their target audience at this point in our lives, because we might not be actively reading the social influencer media posts. I might be completely wrong—I am sure some Government Members are regularly on their Instagram accounts looking at posts by ASOS.
Some 20% of those young people say they have missed a payment in the last year—the figure has doubled in the last year—because they thought that a purchase would cost a certain amount and that they had an income, but that income has gone. The companies will say that they are very good to their customers because they do not lend more than people need and they do not charge interest—the companies’ interest is in people paying back the money—but those companies go silent on what they do when people do not pay back. What happens to people’s credit references? How do they chase money? Do they use debt collection agencies?
Those companies are growing rapidly, just as the payday lending industry did. We watched that happen and, in that Cassandra-like way, all tried to warn of it, but it took too long for us to act. In 2019 Klarna was boasting that it had signed a partnership with a new merchant every eight minutes in this country. By the end of 2019, 6 million people had used its product, and it said that 55,000 were using it weekly. Imagine what it is like now, with people having been stuck at home and stuck on their phones.
The Money and Mental Health Policy Institute found that more than 3 million people with mental health problems have found it harder during the pandemic to control their online spending, and two in five said the BNPL industry has been “harder to resist”. Because it is not regulated, it does not have to follow any of the rules we might want to point to that protect consumers. That is why we see all those adverts saying, “No interest, no fees—don’t worry about it.” The industry does not have to provide the normal financial information we see in other forms of credit because it is not regulated in that way.
Just as with the payday loan industry, as soon as we started talking about these companies, along came the offers of dinners and discussions and talks, where the industry says it is in fact a misunderstood new technology. Those of us who are not regularly on the internet have obviously missed them.
Sadly, during the pandemic, none of us has been able to take up any of those offers to explain our concerns to these companies directly, as opposed to on Zoom. It is a simple concern: the way in which these products are marketed encourages people to spend money as a way of dealing with the emotional and social impacts of the pandemic. The adverts, using those social influencers, say, “When you’re feeling low, sat at home by yourself with nowhere to go, there is something to make you feel better.” Essentially, the message is, “Get into debt. Don’t worry about it. You can spread the payments. Don’t worry about whether you can afford it.” They get away with saying and doing that because they are not covered by the regulations.
I know the Minister is looking at this issue—he said so—and that the FCA is doing so. I have made a series of complaints to organisations such as the Advertising Standards Authority about these issues, because, just as with payday lending, we have seen the rapid expansion of these companies. My worry is that if we take 18 months it could be too late in terms of consumer detriment. I do not doubt these companies when they say they want to have a sustainable business model, but it is for us in this place, in crafting the Bill, to decide what sustainability is and how they make their money. Otherwise, we are handing them our young consumers, in particular, on a plate to be exploited. The new clauses speak to those issues.
New clause 16 would ensure that all forms of consumer credit are covered by regulation, because the gap that Klarna and company have fallen into is arguing that they are not a form of consumer credit so they do not need to be regulated. We should always apply a sniff test: if somebody is giving us money to buy things on tick, that is a form of credit. If it walks like a duck and talks like a duck, it should be regulated like ducks should—see, we have moved on from the dinosaurs to ducks.
New clause 17 would make rules explicitly about the buy now, pay later industry. I do not believe we can wait another year or so before we do something. It makes sense to bring the industry under the FCA’s umbrella so that the FCA can act. The new clause would ensure that Ministers could act based on the industry’s actions, given the risks that come from them. Unlike customers of Amigo Loans or indeed the remaining payday loan industry—or even the credit card industry—nobody who uses buy now, pay later can go to the ombudsman for redress, so what do they do if they get into difficulty? I pay tribute to Alice Tapper from Go Fund Yourself, who has been collecting the evidence about young people getting into debt from unaffordable forms of spending with such companies and not knowing how to get out of it.
New clause 22 is about re-lending, which the FCA has been doing a lot of work on. Indeed, it put out a report in August this year about re-lending in the high-cost credit sector, so it knows that there is a problem. Its evidence shows that for the high-cost lending business models in its sample, re-lending is a “significant part” of their business—in other words, hooking people in, making them keep paying money and getting them into debt that becomes a problem. The FCA said:
“We are concerned in some instances to see levels of debt and repayments increase significantly. We saw levels of relending often double within a 2 to 3 year period.”
This meant that 48% of customers had to cut back on other spending—in other words, buying food for their families and paying their mortgages—to make their loan repayments, while 16% of customers reported that their most recent re-lending was taking out debt to repay other forms of debt; they are trapped in that model.
Through new clause 22, we are saying that it is not enough for the FCA to keep writing to these companies and warning them that this is not a good, sustainable business model—rather, we should do something about it. We should recognise that the FCA’s research shows that there is a problem, and therefore re-lending needs to be acted on. As with Amigo Loans, where we see a massive rise in people getting into trouble, when we have the evidence before us and we can see how quickly this industry works, surely we must act. As discussed in relation to the previous amendment on FinTechs, Klarna will try to hide behind the idea that it is new and modern, but this is always going to be a very old problem: what is a fair price to pay for credit? It benefits all of us to have a fair and competitive credit market. At the moment, it is neither, when exploitation is so easy to perpetuate and when the FCA has its hands behind its back because it has to find forms of credit that fit the particular model.
Let us not bind the FCA’s hand when it comes to the most effective way of protecting all our constituents; let us give it the ability to cap. Let us send a strong message to new entrants to the market from overseas such as Klarna, Clearpay and Laybuy that they can come to the UK, but they must treat our consumers fairly. Let us ensure that we never see another Wonga or QuickQuid or credit card scandal again in this country. The honest truth is that it will turn up in our constituency casework first, and then it will be a national scandal, as we will never get out of the economic impact of this pandemic because people will never have enough money to cover the month.
I would like to sincerely thank the hon. Member for Walthamstow for her tireless work in this area—she does not look too happy that I have said that, but I sincerely mean it. I recognise the contributions she has made to cap the cost of payday lending. That has made a significant difference, and although we differ on some elements, my vigilance is seriously minded towards these problems, and I will try to respond in full to the points she has made.
As the hon. Lady knows, the Government have given the FCA the power to cap all forms of regulated credit, and the FCA can do so if it thinks it is necessary to protect consumers. I note that her new clause seeks to require the FCA to use this power for all forms of consumer credit and that the retained reference to “high-cost short-term credit” appears to limit its application, but I will proceed on the basis of the intention behind the new clause.
Government legislation has previously required the FCA to use this power, leading to the 2015 cap on the cost of payday loans, and Government will consider further action as circumstances require. However, the Government do not encourage regulatory intervention where there is no clear case for doing so. That can increase the costs to business, which are usually passed to consumers, or lead to products and services being commercially unviable, reducing consumer choice.
While the Government imposed a requirement on the FCA in legislation to use its capping powers for payday loans, the context for that intervention was very different from the current consumer credit market. The Government legislated only after agreement between the FCA and Government that the cap was necessary, in response to the well-evidenced harm that was occurring in the payday lending market, which the hon. Member for Walthamstow has done a massive amount of work to promote awareness of. Introducing this duty on the regulator ensured that its efforts were focused on implementing the cap quickly, rather than spending time and resources on making the case for a cap in the first place. Following this successful intervention, the FCA independently implemented a similar price cap on rent-to-own products in March 2019 in response to the FCA finding evidence of consumer detriment as a result of excessive charges.
The FCA keeps the issue of capping the cost of other types of credit under constant review. There is not an equivalent case today that necessitates this action. Therefore, we should not legislate to force the FCA, as the independent and expert regulator, to implement a cap. As can be seen from the payday and rent-to-own markets, in some cases price caps can be effective in protecting consumers from the most egregious harm. However, a blanket cap would not take into account the idiosyncrasies of the breadth of consumer credit products on the market and could give rise to unintended consequences.
Let me turn to new clause 17. This amendment speaks to the exemption under article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. That exemption covers interest-free loans, repayable in no more than 12 instalments, within no more than 12 months, used for the financing of specific goods and services. It allows businesses such as gyms and sports season-tickets providers to avoid the burden of FCA regulation for offering deferred payment terms for the goods and services they provide. It also catches many everyday transactions, where the supplier of goods or services issues an invoice and affords a period of time to pay.
The exemption is important in allowing low-risk day-to-day business activity to be undertaken without firms needing to be authorised by the FCA or to comply with consumer credit regulation. However, the Government are alert to the specific concerns about buy now, pay later products that utilise this exemption. I know that the hon. Member for Walthamstow is concerned about the way in which those products are advertised, as she set out this afternoon, and the risk of borrowers unknowingly building up problem debt.
An interest-free credit, unregulated, buy now, pay later product, as it is inherently lower risk than other forms of borrowing, can provide a lower-cost alternative to help people buy the products they need and can be a useful part of the toolkit for managing personal finances and tackling financial exclusion. However, despite the potential benefits and the fact that we are yet to see substantive evidence of widespread consumer harm, the Government and the FCA are aware that risks are associated with those products, as with any type of borrowing. Therefore, the former interim chief executive officer of the FCA, Chris Woolard, is urgently undertaking a review into change and innovation in the unsecured credit market.
The Government welcome the review. I have spoken with Chris Woolard about it, and he attended the financial inclusion forum in the past few weeks. A key focus of the review is on areas of growth from non-traditional providers of credit, which includes unregulated, buy now, pay later products, which the hon. Lady described. It will assess both the supply and the demand sides of the market, cover the customer journey and engage with the main providers to better understand business models and how customers interact with such firms. The FCA has also commissioned consumer research to help inform its understanding. I recognise that particularly vulnerable groups of consumers seem to be using such products more.
The review is due to present its conclusions early next year, in a few months. If it concludes that there is the potential for significant harm occurring as a result of those exempt products, the Government will assess the options for how to address that best, and whether they would be proportionate to counter such harm.
I will now turn to new clause 22. As I noted previously, the Government have fundamentally reformed regulation of the consumer credit market, giving control of the area to the FCA in 2014. That more robust regulatory system is helping to deliver the Government’s vision for a well-functioning and sustainable consumer credit market that can meet consumers’ needs. The Government have given the FCA strong powers to protect consumers, and the FCA assesses whether a firm’s business model is in a consumer’s interest as part of the authorisation process.
In 2017, the FCA confirmed that, in its assessment of firms’ business models, it considers how each firm makes money. That allows the FCA to identify any economic incentives that a firm might have to cause harm to consumers and to take appropriate mitigating actions.
In its August report on re-lending by high-cost lenders, the FCA set out clearly the potential issues around re-lending. The report identified ongoing concerns about the business practices of some of those lenders, which it deemed to be breach of FCA rules and principles for business. More importantly, the report reiterated the FCA’s expectations that firms should treat their customers fairly. It made it clear that it expects firms to review their re-lending practices so that they can properly assess affordability; further, that any re-lending firms undertake is sustainable and will not give rise to borrowers entering into problem debt; and, finally, that the customer’s full financial position should be taken into consideration when making those re-lending decisions.
While the hon. Member for Walthamstow is right that re-lending can cause consumer harm, it is clear that the FCA understands the issues and is acting where necessary to protect consumers’ interests. As I have set out, the FCA will consider consumer interest in relation to a firm’s business model during the authorisation process, and will monitor the market through its supervision process, reminding firms of their obligations and intervening where necessary. I therefore ask that the hon. Member for Walthamstow withdraw the new clause.
As well as winner of a Titmuss prize, I think you will find, Dr Huq. My father got excited that I meant Abi, and my mother thought I meant Fred—it was neither.
I listened to the Minister, and was all eerily familiar. It was like the conversations that we had on payday lending, when everyone mentioned the then Office of Fair Trading. I appreciate that that conversation was not with the Minister, but the outcome for our constituents will be the same. It is Christmas; does he think that Klarna, Clearpay and Laybuy will not be heavily pressing their product on our constituents?
We could vote to send a message that change will come in the next couple of months. We could sound the alarm that we did not sound on payday lending until millions of people were in debt. The Minister knows that the FCA has been, and will continue to be, timid about using capping, because it is looking for political leadership to say that capping is the right to do.
I am happy to withdraw new clause 16, but I will press new clause 17 to a vote because I think we should send a message that we are listening to the consumers who are already in debt with those buy-now-pay-later companies. It is an incredibly reasonable clause that says that we will regulate and not leave people hanging. The Minister has not given any succour to that idea. He has talked about a review and the possibility of some consideration later, but that is just too late. Too many people are already in debt with those companies. I hope, if the Minister will not listen to me, that he will at least listen to Martin Lewis and Alice Tapper, who have been trying to help people in financial difficulty because they cannot go to the ombudsman. I beg to ask leave to withdraw the motion.