Financial Services Bill — House of Lords, 2021-04-14
Topic: Domestic Commerce
Susan Kramer (Liberal Democrats, Centre to centre-left): My Lords, the two amendments in this group are significantly different from each other, so I am afraid that I will have to address each one separately, starting with government Amendment 14. We obviously support this step, but some comments need to be made. First, the very fact that legislation has to be passed for these financial transactions to be captured by the regulator demonstrates some of the flaws in the whole approach of using a regulatory perimeter as the mechanism for deciding which activities are regulated or not The buy now, pay later industry has been growing at an astonishing rate over the last several years. The largest player is Klarna, which I think was valued in its last funding round at $31 billion—three times its value six months earlier. That gives noble Lords the idea of the pace. Anybody who wants to look up buy now, pay later on the internet will find company after company. This issue has galloped away without the regulator becoming involved. It suggests to the Government that some real rethinking needs to happen, given the pace of innovation that we now see generally in finance Secondly, I was concerned by some of the language the Minister used when talking about this as a relatively low risk and rather benign form of financing. There is no free lunch. There is no such thing as a delayed payment that does not have an interest cost embedded in it. I understand that with buy now, pay later, it is the retailer that pays fees to the intermediary providing the advance payment. Those costs then fall on everybody buying products from that particular company. We get to the point where you are a fool if you pay up front, because within the cost of the product is embedded an element of financing that is falling on you. If you are a bit like me, you see the price and you pay it, but I know that I am paying more than I should because I am picking up the cost of financing that has been given to other people using the buy now, pay later product. There certainly is cost embedded in all of this; it is not a free lunch Martin Lewis gave evidence to MPs in December, pointing out that this is a product very much targeted at the under-30s, although I know that Klarna disputes this. It is having the impact of getting them into debt. Again, I looked to a quote from Jane Clack, a money adviser at the debt advice firm PayPlan. She was talking about what had happened over the two-year period. She said: "This form of introduction to credit … supports the ‘I want it now’ purchases of items people may not be able to afford. We have seen a worrying increase in the number of young people contacting us for free debt advice. It now makes up more than a fifth of our total client base." This is a mechanism that is getting a lot of young people into overpurchasing and consequently into debt. Indeed, the advertising on websites directed at retailers, encouraging them to sign up to buy now, pay later firms, tells them that the average spend will go up by 20% if they sign up to a buy now, pay later scheme because individuals feel, "My goodness, if that’s all it costs I can spend even more." Noble Lords can see the pattern that is developing. Frankly, there is a lot of risk associated with all this, and I hope it is with that perspective that the whole consultation will go forward and regulation will be structured I say this because we went through the same process in this House of saying "it is largely benign" when we looked at payday lending. That was the argument made by the regulator. If this House remembers, the regulator had the power to take action in a serious way against abusive payday lenders. It showed a light touch because it saw payday lending as relatively benign. It was only when this House forced the regulator’s hand by passing regulation that required it to start using interest rate caps that that industry was brought under control. Indeed, most of the players instantly disappeared, because without the abusive part of their activities the other part could not be sustained. This issue should be taken very seriously by the regulator, which should not get caught up in the idea that this is low risk or in some way benign. I am always troubled when I hear that something is interest free. No, it is not; the interest is differently packaged On Amendment 35, I continue with apologies from my noble friend Lady Tyler, who is the former chair of the Lords Select Committee on Financial Exclusion. As the Deputy Speaker said, she is speaking in Grand Committee and has had to scratch here. She very much appreciates the spirit of the amendment of the noble Lord, Lord Holmes, but I will quote a sentence from the speech she wrote that I think captures the fundamental issue: "What is still missing is an overarching strategy and responsibility across government, regulators and industry proactively to promote financial inclusion." In a way, that is the issue that the noble Lord, Lord Holmes, is picking up and addressing and that I hear echoed in the words my noble friend would have used The noble Baroness, Lady Noakes, made the case that the Bank of England is really not the place to have a basic bank account, and I want to pick up on this important issue. The current high street banks that provide basic bank accounts do so, as the noble Baroness said, reluctantly. It does not make any sense in the context of their business plan, their overheads or the clientele that they want to build There is an important strategy that could be addressed, certainly by the PRA, along the lines of, "As a condition of your banking licence, perhaps you don’t have to provide a basic bank account, but you do need to support the civil society groups that can service this excluded community"—because that is a community that often needs a detailed helping hand. That is one of the reasons why opening a basic bank account at the Bank of England would not get people in that community very far. Typically, they are people who need particular services and particular kinds of support to become financially included, and to get the advantages that come with being financially included in our modern society That takes me to the issue raised by the noble Baroness, Lady Neville-Rolfe; it is a canard that needs to be captured very quickly. The Community Reinvestment Act in the United States, to which she referred, was passed in 1977. It was not a play into the sub-prime mortgage crisis. I lived in Chicago in those years, so I know that it came about as a civil rights Act, because disadvantaged communities—primarily black ethnic communities—had been literally red-lined by all the major banking players, which would take deposits from them but would never lend back to support mortgages or businesses. It was a crucial Act that completely changed the nature of financial inclusion in the United States, and it was probably one of the most important pieces of legislation there. I have always regretted that we have not picked up its themes and extended them here, because it created a layer of community banks and credit unions that serviced this community, and did so very well throughout the years of recession The sub-prime crisis was, on the one hand, sheer fraud—as I think the noble Baroness, Lady Neville-Rolfe, knows—and, on the other, the packaging up of fraudulent loans into portfolios against which securities were then issued on the grounds that diversification within the portfolio removed the risk. This was not a case of lending into communities in the responsible way driven forward by the Community Reinvestment Act. I hope that we will pick up the lessons of that Act, because in the United States people are not unbanked and excluded to the extent and breadth that they are here in the UK.