Draft Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025
(2 days ago)
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The Parliamentary Secretary to the Treasury (Torsten Bell)
I beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025.
It is a pleasure to serve under your chairmanship, Mr Stuart.
Consumers have waited too long for the change before us. More than 10 million people now use buy now, pay later products. When used responsibly, such products can help people manage their finances. Many especially value the fact that the products are interest-free, often making them an affordable alternative to credit cards and personal loans. Yet, unlike those traditional forms of credit, buy now, pay later products sit outside the UK’s consumer credit regulatory framework. That is because buy now, pay later products fall under an exemption originally designed to help small businesses offer instalment plans to their customers. In recent years, however, innovative fintechs have used the exemption to roll out buy now, pay later products offering to customers, usually at an online checkout, new ways to pay via the likes of Klarna, PayPal and Clearpay.
Small firms do not need authorisation from the Financial Conduct Authority, nor are buy now, pay later agreements required to adhere to the Consumer Credit Act. That approach makes sense for small businesses offering simple instalment plans for goods and services, but it is not right for the large-scale consumer credit lenders now in this market.
Back in February 2021, under the previous Government, the Woolard review set out the risks of that unregulated market. First, there are no rules on what information buy now, pay later firms must give their customers. Too many people are left unclear about what they owe, and some do not even realise that they have taken out credit. Secondly, the firms are not required to check whether people can afford these products. Finally, that lack of checks brings real danger.
Chris Vince (Harlow) (Lab/Co-op)
Does the Minister agree that this draft legislation is particularly important to protect those facing hardship? Potentially, people—certainly residents in my constituency—may feel the need to turn to buy now, pay later products, but given that they are not regulated, that could lead them into further debt.
Torsten Bell
My hon. Friend makes an important point that is generally relevant to financial services regulation: we want the availability of credit for people, but we want it done safely. That is exactly what the changes are about. As I was saying, debt can quickly mount up when people take out several buy now, pay later products at once, with no one checking what they already owe.
The previous Government rightly pledged to bring the products into regulation, although sadly did not get to the point of delivering on that promise. I am proud that, in May, this Government laid this draft order to bring unregulated buy now, pay later products offered by third-party lenders into regulation under the Financial Conduct Authority. That will bring proper oversight of such firms and strong protection for consumers.
In future, buy now, pay later firms will have to carry out robust affordability checks, ensuring that consumers are protected from taking on debt that they cannot afford. Firms will also be required to give consumers clear information. That will help people to decide whether buy now, pay later is right for them, and to know that support is available if they face financial difficulty. Buy now, pay later users will gain strong rights under the Consumer Credit Act, including section 75 protection. That will make it easier for consumers to get a refund if something goes wrong with a purchase. Crucially, consumers will have the right to take their complaint to the Financial Ombudsman Service. That will guarantee them access to a fair, independent resolution if problems arise. Those are the rights and protections that users of other regulated credit products already enjoy. It is only right that users of buy now, pay later products receive them, too.
There is also something new: the Financial Conduct Authority will be able to develop a modernised information disclosure regime for buy now, pay later products, set by FCA rules, not by the Consumer Credit Act. We have recognised, in line with feedback, including from consumer groups, that the existing provisions of the Consumer Credit Act on information requirements do not suit interest-free, short-term buy now, pay later products. However, this is not special treatment for these products. On the same day as we laid the draft order that we are debating today, we launched a consultation to reform the Consumer Credit Act more widely.
Lastly, let me stress that a new regulatory regime is not just a win for consumers. Buy now, pay later firms will benefit as well. For years, they have faced regulatory uncertainty. This order ends that uncertainty, and we have ensured that the order delivers a smooth transition to regulation for them. They will be able to continue lending under a temporary permissions regime while the FCA authorisation is under review. That guarantees business as usual, for them and for customers, throughout the transition.
Twelve months after this order is made, the new regulatory regime for these products will come into force. In that time, the FCA will consult on and finalise the rules that will govern buy now, pay later lending. We must not delay giving millions of consumers the vital protection that they deserve.
I thank the Committee for its attention to this issue and would welcome any questions from the shadow Economic Secretary to the Treasury or any other Members.
Mark Garnier (Wyre Forest) (Con)
It is an absolute joy to serve under your very professional and diligent leadership and chairmanship of this Committee, Mr Stuart. I also congratulate the Minister on his debut in a Delegated Legislation Committee. He does it masterfully.
These buy now, pay later measures, as colleagues will recall and as pointed out by the Minister, were consulted on extensively by the previous Government. As the Minister also pointed out, there was an unfortunate general election, which got in the way of us actually—
Mark Garnier
That rather depends on one’s point of view. I think it was fortunate for everyone in this room apart from Conservative Members.
Moving on, we are absolutely supportive of bringing these products within the scope of financial regulation. As we have heard, the sector has seen rapid growth. Because the products are now used by millions of people, the last Government rightly acted to protect consumers from harm—or wanted to act. The proposed regulations require FCA authorisation, affordability checks and clearer information for consumers, which are all measures that we absolutely support. An ability to access the Financial Ombudsman Service will also give consumers an avenue to escalate any issues.
However, as these regulations have been developed, several concerns have been raised by businesses operating in the BNPL market, and I hope that the Minister may be able to address those issues today. First, the exemption for merchants offering their own BNPL products could create inconsistencies and consumer risks. I appreciate the sentiment for keeping an exemption, and Conservative Members do not want to expose small businesses to burdensome regulation. For example, the local gym should not be required to undertake the FCA approval process to provide a 12-month membership; I am sure that many people would agree with that. However, a potential loophole still exists. A large e-commerce website, such as Amazon, could offer BNPL directly and not come under these regulations. That is because there is no way in the Consumer Credit Act to distinguish between a large e-commerce site and a small or medium-sized enterprise. Currently, no online retailer is operating its own version of BNPL, as opposed to using a third party provider. However, I am sure that the industry would welcome reassurance from the Minister today that the Government will be looking at any knock-on effects that these regulations might cause.
Opposition Members also welcome the Treasury’s saying that work is under way to review and reform the Consumer Credit Act, but I hope that the Minister will confirm that the review will specifically address the issue of definitions, ensuring that there is a way to distinguish between the largest retailers and small businesses. Will the Government also provide further details on how they will go about monitoring the prevalence of retailer-provided BNPL services, and at what point they will intervene once they see evidence of such activity taking place?
Secondly, short-term lenders have highlighted the fact that although interest-free agreements under 12 months will fall under a new regime, longer or interest-bearing agreements remain subject to older rules. A 10-month interest-free instalment agreement and a 14-month low-interest agreement may be economically and structurally similar, but one will benefit from modern disclosure rules while the other will not. I hope that the Minister can address whether that has the potential also to be reviewed as part of the review of the CCA.
Finally, the regulations do not address late fees, which can disproportionately impact vulnerable consumers, so again I would welcome the Minister’s setting out today whether the Government will also keep that under constant review.
The Opposition support the intent of these regulations, but call for the Government to address some of the outstanding points raised by the industry in order to ensure robust consumer protection and a level playing field for everybody participating in this market.
Daisy Cooper (St Albans) (LD)
We Liberal Democrats warmly welcome this statutory instrument, which will introduce long-overdue consumer protections. We particularly welcome the fact that buy now, pay later will fall under FCA regulation, as well as the fact that consumers will have access to the independent complaints system under the Financial Ombudsman Service. We are also delighted to see the introducing of affordability checks. All three of these measures are consistent with our own party policy, which we debated fiercely among our membership at our autumn conference last year.
However, like the official Opposition, we are concerned about the proposed merchant exemptions. We know that merchants who provide credit directly will be outside the scope of this particular regime, and we know that respondents to the Government’s consultation raised concerns that exempting these merchant providers, where the provider of the goods and services is also the provider of the credit, could create an uneven playing field. My understanding is that the Government have committed to closely monitor the merchant-provided market for buy now, pay later, and to take action if there is evidence of consumer harm. Can the Minister set out how the Government intend to closely monitor the situation, and over what timeframe?
I have a few other questions for the Minister. If he is not able to answer them, I would be very grateful if he were kind enough to write to me with the answers. First, will the Government also be putting rules in place to stop buy now, pay later firms from engaging in harmful or misleading advertising, and requiring them to make it clear that buy now, pay later is a form of credit? Could he clarify whether that is covered by this statutory instrument, or are further measures needed? Can the Government confirm whether buy now, pay later will be brought under the consumer duty rules for financial products, which require that key information is clearly set out and that products are designed to enable informed consumer decisions? Could the Minister also outline whether the FCA will have the powers to consider setting a centralised cap on late fees for buy now, pay later, to promote fair and consistent treatment across all the different platforms?
On two slightly separate but related issues, do the Government have any broader plans to improve awareness of debt relief orders, and to seek ways to expand access to the scheme? We know that there are around 3.7 million UK adults in debt who are unaware that they can seek help through those debt relief orders. More broadly, do the Government have any plans during this Parliament to look at widening access to low-interest credit, such as through community banks, which would be a completely alternative source, so that people would not have to use buy now, pay later mechanisms in the first place?
Chris Hinchliff (North East Hertfordshire) (Lab)
It is a pleasure to serve under your chairmanship, Mr Stuart. I would like to ask a few questions about article 3 of the order. In practice, its current drafting means that the order would regulate Klarna, if it offered buy now, pay later agreements to customers shopping on Amazon, but it would not regulate Amazon, if it offered such agreements in the future to its own customers.
Given that FCA research shows that adults with vulnerable characteristics are disproportionately likely to use buy now, pay later, with 44% of the most frequent users of buy now, pay later already over-indebted, there is concern that the consumer focus of buy now, pay later is not about informed borrowing but engineered overconsumption. I accept that the Minister may feel that it is not currently an issue, but would it not be wise to regulate proactively and take action now to prevent buy now, pay later being offered directly by merchants in a way that would cause the very harms that we are currently trying to avoid from third-party providers?
Torsten Bell
I thank Members for their comments. Let me try to do justice to their questions in turn.
The core question raised by my hon. Friend the Member for North East Hertfordshire and both Opposition spokespersons was about merchant-offered credit. First, we do not see huge evidence of that happening. As things stand, we cannot see large providers doing that, and there are good reasons why they would choose not to.
Secondly, where large providers look to do that kind of thing, they tend to do it through a separate finance arm. Where that is the case, it will be required to be FCA-authorised, and the wish to avoid that lending sitting on the balance sheet of the retailer is a strong disincentive to the kind of activity that is being discussed. There are risks on the other side, because if we accidentally bring instalment plans or gym memberships into regulation, that would be a significant loss to consumers. We do not see the evidence today, but as I said, the Government will keep this under active review.
I can confirm that the wider CCA reforms will look at the question of definitions. The big picture is that when the CCA was created, the FCA did not exist, so primary legislation was very prescriptive about the nature of regulation. However, markets, technology and products have changed significantly, so we do not need the primary legislation to be as specific as it has been in the past, and there is more role for FCA rules to carry out that purpose.
In terms of next steps, the first phase of the review is under way. There will be a second consultation covering rights and protections later this year, and then there will be one Bill, bringing together the conclusions of that, to introduce that reform. That is also the answer to the question that the hon. Member for Wyre Forest asked about the unfairness of a 12-month cut-off in terms of the level of regulation we are talking about on the disclosure of information requirements that will apply to buy now, pay later. The lessons from that consultation over the next year will also inform what the future FCA rules might look like for the wider market under CCA reform. I am sure we will keep debating that, and that he will debate it with the Economic Secretary to the Treasury in the months ahead.
The hon. Member for St Albans mentioned the consumer duty. I can confirm that, because these will be FCA-authorised firms, it will apply in the normal way. The question of fees was also raised. I should remind everyone that FCA-authorised firms are already not allowed to impose fees and charges on customers who are in arrears or default beyond the costs required to match their costs. They are not allowed to rack up arrears and fees for people who are already in that situation. That is progress that has been made in recent years.
Lastly, I can confirm that the Government will publish their financial inclusion strategy, covering many of the issues that have been raised. It is a chance to pick up the wider questions about financial inclusion that I know are important to all Members.
In conclusion, let me stress once again that millions of people are using buy now, pay later products every year. They value that in many cases, but they deserve vital consumer protections, and we must not keep them waiting any longer. That is what this order does, so I hope Members will join me in supporting it.
Question put and agreed to.