Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025

Considered in Grand Committee

15:45:00

Moved by

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025. Relevant document: 28th Report from the Secondary Legislation Scrutiny Committee (special attention drawn to the instrument)

My Lords, I begin by extending my thanks to the Secondary Legislation Scrutiny Committee for the detailed and thoughtful consideration of this draft order in its report published last month; I will respond fully to the points raised by the committee. I also take this opportunity to welcome the support for these reforms from consumer groups, from firms offering buy now, pay later products, and from the Official Opposition, who first initiated the process which has led to this order. The purpose of the legislation before your Lordships’ Committee today is to protect consumers and provide certainty and stability for business. I will begin by providing a brief overview of the issue which this order seeks to address before outlining the steps the Government are taking to mitigate these harms. More than 10 million people in the UK now use buy now, pay later products, which allow consumers to pay for goods and services through interest-free instalments over a period of 12 months or less. Fintechs such as Klarna, PayPal and Clearpay typically partner with merchants, predominantly online retailers, which offer their buy now, pay later options to customers at checkout. When used responsibly, these products can help users manage their finances and make purchases more affordable, compared with using traditional, interest-bearing forms of credit such as credit cards and personal loans. However, unlike these traditional forms of credit, interest-free buy now, pay later products are not currently regulated by the Financial Conduct Authority. This is because they fall under an exemption which was originally designed to help small businesses offer instalment payment plans to their customers: for example, a gym offering a 12-month payment plan. The 2021 Woolard review, which investigated recent innovations in the consumer credit market, highlighted several potential risks facing people who use unregulated buy now, pay later products. First, there are no rules on what information firms must give their customers. Too many people are left unclear about what they owe and when they need to repay it—and some do not even realise they have taken out credit at all. The Financial Conduct Authority previously found that nearly a fifth of buy now, pay later users were not aware they would be charged a late fee for missed payments from fee-charging providers. Secondly, buy now, pay later firms are not required to check whether people can afford these products. This means that credit is being given to those who may not be able to pay it back. Finally, firms are not required to check what an individual already owes. As a result, debt can quickly mount up when people take out several buy now, pay later products at once. For example, research from Citizens Advice found that almost a third of buy now, pay later users it surveyed had borrowed from elsewhere to pay off their buy now, pay later debts. The Government believe that action must be taken to address these issues and protect consumers. That is why, under this draft order, buy now, pay later products offered by third-party lenders such as Klarna, PayPal, and Clearpay will be brought into regulation under the Financial Conduct Authority. Under the new regulatory regime, firms will have to carry out robust affordability checks before lending to make sure that consumers are protected from taking on debt they cannot afford. Consumers will receive clear and transparent information about buy now, pay later products, including what support is available if they face financial difficulty. In addition, for the first time, consumers will have the right to take their complaints about buy now, pay later firms to the Financial Ombudsman Service, guaranteeing access to fair and independent resolution if problems arise. These are rights and protections that users of other regulated credit products enjoy already; it is only right that users of buy now, pay later products receive them too. The Government acknowledge concerns raised in the Secondary Legislation Scrutiny Committee’s report that buy now, pay later products offered directly by merchants will not fall under the new regulatory regime. We examined this issue carefully before publishing the order before your Lordships’ Committee. Protecting small businesses from regulatory overreach was central to our approach. Regulating buy now, pay later products offered directly by merchants threatens to capture simple, interest-free instalment plans, such as the gym membership example that I referenced earlier. Regulating these arrangements, which small businesses routinely offer to their customers, would create unjustified disruption for countless small businesses and their customers, imposing regulatory burden without sufficient evidence of consumer harm to support it. The Government are also confident that there are robust existing protections in place to safeguard consumers using merchant-offered buy now, pay later products; current consumer protection laws covering advertising, financial promotions and unfair trading practices apply to these products already. Finally, our assessment is that it is inherently unlikely that many merchants will offer their own products because of the associated credit risk and the accrual of new liabilities on their balance sheet. Instead, we believe that many would be minded to create a subsidiary to supply the credit or to partner with separate credit providers—both of which arrangements would fall under the scope of these changes. We will, however, continue to monitor this market closely with the Financial Conduct Authority and through our regular industry engagement, and, if we see evidence of potential consumer harm, we will not hesitate to act. The second key aspect of this order relates to the Consumer Credit Act 1974. The Secondary Legislation Scrutiny Committee’s report questions whether the Government should consider whether definitions in that Act can be amended to distinguish between low-risk buy now, pay later products offered by small businesses, such as private gym memberships, and buy now, pay later products offered by large-scale merchants. The Government agree that this is an important issue, which is why the forthcoming consultation on Consumer Credit Act reform will seek input from stakeholders to ensure that any potential changes we make to these definitions are appropriate. I want also to touch briefly on the other provisions in the order as they relate to this Act. The order before us will ensure that users of buy now, pay later products will have protection under Section 75 of the Consumer Credit Act, making it easier to receive a refund if a supplier breaks a contract or misleads the customer. Under the current laws of contract, customers can seek compensation for defective goods or services only from the supplier for breach of contract. Our changes will strengthen consumer rights by making buy now, pay later lenders equally responsible for problems with purchases when they have provided the credit. This will give consumers a key statutory right enjoyed by users of currently regulated credit products. Separately, consumers will also now receive clear and relevant information about buy now, pay later products, including details about what they owe and when payments are due. The new requirements will be set by Financial Conduct Authority rules, rather than the Consumer Credit Act. This change reflects feedback from both industry and consumer groups that current provisions on information disclosure do not suit interest-free, short-term buy now, pay later products. Although these changes will apply only to buy now, pay later products, the Government have also launched a consultation on reform of the Consumer Credit Act itself, which we are committed to doing at pace; the consultation includes proposals that would see the wider consumer credit industry benefit from modernised information disclosure requirements, too. I turn finally to the impact of these changes on firms offering buy now, pay later products. The Government’s intention is that, while the changes outlined today will help protect consumers, they will also benefit providers. For years, buy now, pay later firms have faced regulatory uncertainty, stalling their growth and investment in the UK. This order ends that uncertainty and allows firms to innovate and invest in the UK. To ensure a smooth transition to the new regime, firms will also be able to continue lending under a temporary permissions regime while their Financial Conduct Authority authorisation is under review. Twelve months after this order is made, the new regulatory regime for these products will come into force. In that time, the Financial Conduct Authority will consult on and finalise the rules that will govern buy now, pay later lending. The changes laid out in the draft order are fair, responsible and proportionate, and we are determined to deliver them promptly to protect consumers and to provide certainty for businesses. I beg to move.

My Lords, I thank the Minister for introducing this order and for his thorough summary. It is an important measure, and the Committee is surprisingly thin today. Borrowing with a defined repayment period is a long-standing practice, with many well-established advantages that most of us have benefited from: for example, in respect of mortgages on our homes. It is a good thing that innovation—buy now, pay later—has developed the lending market but, as always, we need to have an eye on the potential downsides. In this case, that refers above all to the possibility of unsophisticated borrowers getting into financial trouble, probably because of an inaccurate assessment by lenders of the likelihood of any loan being repaid. I accept that in such cases a degree of protection may be justified. That is the philosophical and economic background. However, there is a need for balance so that regulation does not simply close down the borrowing arrangements, which will make life harder for hard-pressed consumers and will risk pushing them into the hands of loan sharks. Another concern is the impact on small businesses, whether in financial services or retail, which we need to protect from overburdensome regulation. The spark of enterprise risks being snuffed out by this Government if they are not very careful about how they treat the smaller operators. Excessive red tape will simply reduce the services available to consumers and increase costs and prices. Over the past few years, consumer spending habits in the UK have undergone a significant change. There has been a surge in the use of buy now, pay later schemes, with 14 million consumers recorded as using the agreements in the six months leading to January 2023. This is, however, still a much smaller market than credit cards. We recognise that there are growing concerns about consumer harm in the sector, with 44% of frequent users of such schemes overindebted in 2022, according to an FCA survey. Misleading promotions, lack of affordability assessments and the possibility of accumulating high debts are examples of the potential harms identified for consumers. Under the previous Government, the 2021 Woolard review proposed the urgent regulation of buy now, pay later payments, but we did not have time to carry this through to completion, so I welcome today’s statutory instrument, which builds on this legacy and addresses lending practices that could harm consumers if they remain unchecked. The proposed order will require buy now, pay later product lenders to be authorised by the FCA, which will give consumers a wider range of protections, including access to the Financial Ombudsman Service for redress. The instrument also requires firms to carry out affordability checks on borrowers and offer clear product information to consumers to prevent unaffordable borrowing. The proposed order rightly offers more protection for consumers, but we must also be sensitive to business voices operating in the buy now, pay later market. We must be conscious that being subject to FCA rules is not a walk in the park. I speak as a former non-executive director of a challenger bank. So I would like the Minister to explain how the FCA plans to develop and implement the buy now, pay later rules over the next 12 months and who they will affect. For example, would Klarna or Clearpay do all the consumer checks, or would they also pose a burden on the retailer—Boots, for example, or a specialist online retailer of the kind the Minister mentioned? I also need an assurance that the regulator will have the capacity, and indeed the will, to approve the three significant suppliers and the others that are caught by the new regulations, and to do so comfortably within the 12-month timeframe. It will take time to develop the rules on creditworthiness and affordability, and a year is not long. In my experience, the FCA is much more concerned about its consumer duties than keeping business running and innovating. In the helpful impact assessment on this order, the compliance costs are assessed at some £19 million to £32 million over 10 years. This estimate seems far too low to me, from my experience of dealing with FCA regulation in three different entities. Of course we need to do the right thing, but the regulatory and legal costs in financial services such as these continue to mount, and that then hits innovation and growth. So I would welcome some reassurance from the Minister on this score and an undertaking that there will be continued engagement between the industry and the Financial Ombudsman Service, because that can also be a vehicle for delay and inconsistency. To put the change in perspective, I would also appreciate an update on the current level of over-indebtedness by frequent users—the worrying figure of 44% that I quoted from 2022—and an indication of the proportion of the total number and value of buy now, pay later borrowers that they represent. I am interested in how many indebted purchasers there are and how significant in number they are in the big scheme of things.

16:00:00

Others, including the Secondary Legislation Scrutiny Committee, which the Minister referenced, have raised concerns about the exemption for merchants offering their own buy now, pay later products and the exclusion for longer or interest-bearing agreements. I would like to understand better these matters and how the Government plan to handle them, but I take comfort from what the Minister said about the Government having powers to intervene again in future if they need to, and about other legislation that applies in many of these cases.

A driving consideration should always be to ensure that the regulations are applied in a way that reflects the needs of businesses and does not unfairly or needlessly disadvantage them. My honourable friend in the other place, Mark Garnier MP, raised the example of a local gym offering a 12-month membership product, which could be dragged into the FCA approval process. It was helpful to hear the Minister there and the noble Lord, Lord Livermore, suggest that this was not the intention. Can the Minister confirm that, and can he agree to keep such nonsenses under active review so that we do not get undesirable regulatory creep?

I understand that there will be a second consultation covering rights and protections later this year. Can the Minister commit the Government to coming to Parliament again once this consultation process has concluded, so we can review the results properly and ensure that any risks are addressed ahead of legislation being introduced?

In conclusion, while we support these regulations in the interest of consumers, we urge the Government to address the concerns that I have raised today and ensure that the FCA and FOS work constructively with the industry to ensure a smooth transition and to minimise bureaucracy. We also seek an assurance that they will provide us with the outcome of their further consultations as soon as possible and in time to influence the future direction of travel.

My Lords, I am very grateful to the noble Baroness for her comments and questions and for her support for these measures which, as she says, build on what the previous Government began. She rightly set out the importance of buy now, pay later products and pointed out the potential downsides, which we absolutely agree on, regarding borrowers getting into trouble and the need to prevent that. She also talked about the need for balance. She is right that the action that we take should not in any way close down an important route for consumers. As I said in my opening remarks, these measures have been welcomed by consumer groups. Although these products can help people manage their finances by spreading the cost of purchases, they can put consumers at risk, particularly from unaffordable lending. The FCA will be able to apply appropriate, proportionate rules on assessing creditworthiness and affordability for buy now, pay later lending, so I am confident that it will not unduly close down these routes. It has been welcomed by the providers and consumer groups. The Government are committed to proportionate regulation. On that point, the noble Baroness went on to talk about the impact on small businesses. Again, they have welcomed this measure to avoid the overly burdensome approach and the regulatory creep she spoke about. That is exactly why protecting small businesses from regulatory overreach was central to our approach. Regulating these products, offered directly by merchants, threatens to capture the simple gym membership example that we talked about. I am happy to give her those assurances on the approach and the way the FCA will approach that. The noble Baroness asked a number of questions about the FCA and the next steps on regulation. Regulation will commence 12 months after this legislation is made. The FCA will consult after the legislation is finalised. The consultation will include the FCA’s proposed conduct rules for regulating buy now, pay later. The FCA will then consider stakeholder feedback and decide whether it needs to amend its proposed approach before making its final rules. Firms will need a period in which to digest and prepare for the final rules before they come into force. The FCA is keen to give industry as much opportunity as possible to prepare its systems and processes before the final rules come into effect. The FCA intends to publish its policy statement and final rules in early 2026. The noble Baroness asked about capacity and my confidence in the FCA. Obviously, that is complete. The FCA is an independent, non-governmental organisation. Its independence is vital to its role. However, it is fully accountable to the Government and Parliament for how it exercises its functions. This accountability is critical to ensuring it advances the objectives given to it by Parliament and is performing optimally. Ministers in the Treasury have a very close working relationship with the FCA. We work together very effectively to solve problems and are able to exchange views frankly. The noble Baroness asked about the second consultation process. Although the consultation is split into two phases, the Government intend to implement the reforms via one legislative vehicle when parliamentary time allows. Once the legislation is in place, the FCA will consult on a policy approach and draft rules for a reformed regime. The noble Baroness also asked about exemptions, which I think I touched on. As I said in my opening remarks, we absolutely have the intention to keep these under review and if further action is required, we will not hesitate to act. I think I have covered all the points that she raised.

The one point the noble Lord has not really touched on is growth and innovation, but I take it from the points he normally makes that he sees this sitting within that context. I think the Chancellor sent a letter to the FCA some months ago encouraging an approach to growth in the way it regulates. So he is right that it is independent and does its own thing but, equally, it is important that it minimises bureaucracy and tries to be efficient and helpful, because it plays such an important part in the economy and with business, but also in protecting consumers.

I completely take what the noble Baroness says; my apologies for not covering that in my initial response. The intention with these specific measures is to be proportionate. That is why we responded in the way that we did to the scrutiny committee, for example. These measures should boost growth and investment. There has been uncertainty in the sector for too long and we are now correcting that. The noble Baroness is absolutely right about the wider response to the regulation. In her first Mansion House speech, the Chancellor set out very clearly that she wanted to see us regulating for growth rather than risk, and for the pendulum to swing slightly further back the other way. The Chancellor has her second Mansion House speech next week; I am sure she will have more to say on that point then.

Motion agreed.