FCA's Chris Woolard: The way in which to purchase pays off later (Visitor Commentary)
I've listened to a lot of people buy now and pay later (BNPL) over the past few months. This includes politicians, activists (including Martin Lewis) and industry, but also people who use these products on a daily basis.
Isaac (all of those names changed) told us he liked BNPL because it gave him more time to decide whether to keep what he was buying. Maya felt that the option to pay in installments meant that she could afford to buy things she couldn't before.
But Harry found it difficult to keep track of his payments and their due dates, and Isabel was concerned that people who had no control over their expenses could run into high debt. And none of the people we spoke to were confident they knew what could happen if they weren't able to make a payment.
The use of this type of loan has almost quadrupled over the past year, especially as the coronavirus pandemic has left us relying a lot more on online purchases. Around 2.7 billion pounds are borrowed. However, many people do not realize that BNPL loans are not regulated under current law.
Change credit for the future
I am pleased to announce today that the government and the Financial Conduct Authority (FCA) have agreed to my recommendation that this urgently needs to change. It's a change that Martin also promoted.
BNPL products can be an important alternative to other types of credit, which can be far more expensive. However, they also come with their own risks and can easily get into debt. Regulation helps people understand if it's right for them and gives them more rights when they do.
This is just one of the changes I recommended as part of my Unsecured Consumer Credit Review published today. The FCA took over regulating credit in 2014 and made it work much better. It has capped payday loans, saved credit card customers up to £ 1.3 billion a year and prompted companies to repay more than £ 900 million to consumers to fix their mistakes.
But loan products and the way people use them have changed in many ways, and this is a market that affects almost all of us – more than 42.5 million people used loans in the UK in 2019. More needs to be done, and my report looks at the type of credit market that will work for everyone.
A big task ahead of us
There is a lot to be done – for the FCA, for the government, and for many other bodies that the FCA works with. To give you a few examples:
- The economic impact of the pandemic is causing many more people to need help with debt Free debt counseling requires long-term fundingthe broken market for Individual Voluntary Agreements (IVAs) needs to be fixed, and it is unfair for the worst pay to be for debt relief contracts.
- People who currently only have access to expensive loans still need it cheaper alternativesand the law should be changed to allow the credit unions to help ensure this.
- The FCA must learn from the success of the actions it has taken Companies help to help their customers during the pandemic and see what may need to continue.
- And overall Credit regulation should focus more on how people use products in the real world and how these products affect it over time.
You can read the full report and all of our recommendations on the FCA website. It will be a lot of work for regulators, government and industry, but a stable and sustainable credit market will make it worthwhile for consumers.