Response to FCA consultation on Deferred Payment Credit regulation

Consumer Scotland is the statutory body for consumers in Scotland. Established by the Consumer Scotland Act 2020, we are accountable to the Scottish Parliament. The Act defines consumers as individuals and small businesses that purchase, use or receive in Scotland goods or services supplied by a business, profession, not for profit enterprise, or public body.

Our purpose is to improve outcomes for current and future consumers, and our strategic objectives are:

• to enhance understanding and awareness of consumer issues by strengthening the evidence base
• to serve the needs and aspirations of current and future consumers by inspiring and influencing the public, private and third sectors
• to enable the active participation of consumers in a fairer economy by improving access to information and support

Consumer Scotland uses data, research and analysis to inform our work on the key issues facing consumers in Scotland. In conjunction with that evidence base we seek a consumer perspective through the application of the consumer principles of access, choice, safety, information, fairness, representation, sustainability and redress.

The Consumer Principles are a set of principles developed by consumer organisations in the UK and overseas.

Consumer Scotland uses the Consumer Principles as a framework through which to analyse the evidence on markets and related issues from a consumer perspective.

The Consumer Principles are:

• Access: Can people get the goods or services they need or want?
• Choice: Is there any?
• Safety: Are the goods or services dangerous to health or welfare?
• Information: Is it available, accurate and useful?
• Fairness: Are some or all consumers unfairly discriminated against?
• Representation: Do consumers have a say in how goods or services are provided?
• Redress: If things go wrong, is there a system for making things right?
• Sustainability: Are consumers enabled to make sustainable choices?

We have identified access, choice and information as being particularly relevant to the consultation proposal that we are responding to.

Overview

Consumer Scotland welcomes the opportunity to respond to the FCA consultation on Deferred Payment Credit (unregulated Buy Now Pay Later): Proposed approach to regulation.

We support the aim of ensuring that the regulatory regime for Deferred Payment Credit (DPC) reduces the risk of harm to consumers while still allowing the market to innovate and grow, allowing consumers to continue to access DPC where appropriate. We welcome the stated aim to “ensure that DPC borrowers get the right information, in the right way and at the right time, which helps them to make good decisions”.

Our comments on the proposals focus on the benefits of regulation of DPC, the importance of clear and accessible information for consumers and ensuing affordability to support engagement with DPC. Our response will also highlight the need for consumers to have appropriate access to affordable credit and the importance of monitoring DPC, including monitoring of agreements that fall outside of the currently proposed scope of regulation.

Benefits of regulation

DPC can provide consumers with a convenient and affordable form of credit, allowing them to spread the cost of goods. Research by Citizens Advice found that the main reasons consumers use DPC are

• to spread payments (45%)
• to delay payments (31%)
• because it is easy to use (29%) and
• not being able to afford the item otherwise (25%).[i]

DPC lending has increased significantly, growing from £0.06bn in 2017 to over £13bn in 2024 with 20% of UK consumers (10.9 million adults) having used DPC in the 12 months leading up to May 2024.[ii] While many consumers use DPC relatively infrequently (20% used it only once in the 12 months to May 2024, and 44% used it two to four times) the frequency of its use is increasing.[iii] This significant rise in uptake and increasingly mainstream nature of DPC, while positive for many consumers, can risk harm being caused to consumers, particularly those in vulnerable circumstances. 

Research has found that the current customer journey lacks the information, affordability checks and care necessary to stop people falling into debt.[iv] The Financial Lives survey highlights levels of regret from consumers using DPC in relation to spending more than they could afford and being unaware that it is a credit product.[v] The Financial Lives survey also highlights the impact of late fees, missed payments or consumers putting payments on credit cards to avoid missing payments as contributing to a worsening financial situation for some.[vi] There is evidence to show that consumers do not always have a clear understanding of the DPC agreements they are entering into. There is a lack of awareness that DPC is a credit product, in some cases consumers were reportedly unaware that they were even using DPC, with some accidentally using it due to it being the default payment option at checkout.[vii]

The FCA proposals will bring benefits to consumers

Information

Consumer Scotland welcomes the information provisions set out in the consultation paper. These include the requirement for customers to be given information to support them make effective, timely and informed decisions about DPC borrowing before they enter into an agreement, and throughout the lifetime of the agreement. We agree that firms, prior to the consumer entering into an agreement, should proactively give the consumer the ‘key product information’ in a prominent way and give or make available ‘additional product information’ to the consumer. We agree that the key product information should be provided without the consumer having to take any steps, such as a clicking on a link.

We support the aim of ensuring that consumers can understand the status of current DPC agreements, so that they know when repayments are due and how much they still owe. Research has found that, where users have been charged a fee they were not expecting, this often related to problems setting up payments, users not knowing the date of the payment and not having the money for a scheduled payment.[viii]

We agree that firms should notify consumers when an event occurs during a DPC agreement that could have a negative impact on their financial wellbeing and could lead to their financial situation deteriorating.

We also agree that firms should provide guidance and support to consumers. Consumers in, or approaching, arrears or default should be given sufficient information and support by firms. We agree that firms should inform consumers as soon as possible after a missed payment with sufficient information about the consequences and any steps that can be taken. We also support the provision of information about sources of free debt advice when the firm has identified that a consumer is approaching or is in financial difficulty or where there has been an unexpected event such as a consumer missing a payment.

Research shows that there can be insufficient information at the point of purchase to help consumers to understand that DPC is a credit product and to set out what the consequences will be if they are unable to make repayments.[ix] Ensuring that firms make consumers fully aware that DPC is a credit product and have access to the information they need to make an informed decision will be essential. We note from the consultation paper that analysis of the current consumer DPC journey has identified potential best practices that can help consumer understanding, such as the use of infographics and information layering, with key information provided upfront and further detail cross-referenced. This has the potential to support consumer understanding. However, it will be important to consider the range of needs of consumers, including those in vulnerable circumstances. We recommend that firms should implement user testing for information provision to ensure it provides consumers, including those in vulnerable circumstances, with the information that they need to make an informed decision.

Finally, we welcome the fact that regulation will bring these agreements within the scope of the Consumer Duty ensuring that firms will require to understand consumer needs and focus on ensuring good outcomes for consumers. Firms will also be required to have appropriate procedures in place for dealing with DPC customer complaints fairly and efficiently, reporting this data to the FCA, and referring complaints to the FOS. We welcome these improved measures to ensure easy access to redress.

Affordability

Consumer Scotland supports measures to make DPC lending affordable for consumers and to ensure borrowers in financial difficulty get appropriate support. We support the requirement for lenders to make a reasonable assessment of not just whether the consumer will repay, but also their ability to repay affordably, and without this significantly affecting their wider financial situation.

We note that many DPC users display characteristics of vulnerability, low financial resilience and have poor credit histories. The Financial Lives survey found that 67% of frequent DPC users in 2024 had a personal income of less than £30,000, 54% had low financial resilience, and 26% were in financial difficulty because they had missed paying domestic bills and/or credit commitments in three or more of the previous six months.[x] Research by the Money and Pensions Service (2023) found that 4 in 10 people had borrowed money to pay off DPC, with this figure rising to half of respondents in the 18-34 age group.[xi]

The consultation paper notes that information from DPC lenders suggests that when a consumer misses repayments, firms will lend again as soon as these payments are brought up to date, even when this happens multiple times. We welcome the acknowledgement that firms should consider individual consumers’ financial position and form an informed view about their wider financial circumstances and whether further borrowing might increase their overall financial pressures. We recommend that the FCA monitors levels of repeat lending that occurs following multiple missed payments and provides firms with guidance to support them taking a more robust view of consumers wider financial circumstances.

Ensuring access to affordable credit and monitoring products out of scope will be key

We note that one of the potential unintended consequences of the proposed regulation is the unintentional or inappropriate restriction of access to DPC. The consultation paper notes the potential for lenders to be overly cautious in their creditworthiness assessments, resulting in loss of access to DPC for consumers who would find DPC agreements affordable. DPC provides many consumers with access to convenient and affordable credit. It will be important to consider what alternative options will be available to consumers if access to DPC is restricted due to stronger affordability limits. We recommend that the FCA provides guidance to firms on their approach to conducting affordability checks and monitors the affordability limits put in place to ensure that they are not disproportionately impacting on consumers on lower incomes and restricting their access to affordable credit options.

We have concerns that the removal of DPC for some consumers may increase the reliance on less affordable credit options for some consumers, particularly those in vulnerable circumstances. Where affordable credit options are removed for consumers, there may be a risk that consumers increasingly use higher cost credit options or wagestream lending, which could negatively impact on their wider financial circumstances. The Financial Lives survey found that use of high cost credit increased from 2.8 million UK adults (5.3%) in 2022 to 3.5 million (6.4%) in 2024,[xii]. The survey findings also showed that many of these users opted for high cost credit due to the ease of applying and the likelihood of being approved.

Following the introduction of new DPC regulations, we recommend that the FCA closely monitors both application to and eventual usage levels of higher interest or alternative options. This should include monitoring and research to examine any increase in consumer borrowing from illegal lenders, or any change in the number of people borrowing money through informal routes, such as from friends and family.

Consumers who are declined for other credit options may also find their credit rating affected by this. Where consumers are declined, we also recommend that the FCA takes action to ensure that they are referred to other sources of help and support such as free financial advice.

We note from the consultation paper that retailers who offer their own form of DPC will be exempt from regulation, along with retailers that act as credit brokers for DPC. We recommend that the FCA monitors the use and availability of these in-house DPC arrangements to ensure that they are not causing disproportionate impacts to consumers using them when compared to regulated DPC.