Borrowers from Britain’s booming £2.7bn “buy now, pay later” industry will soon be able to complain to the Financial Ombudsman Service after it was announced that lenders would be regulated under new government schemes.
It comes as regulators warn there is an “urgent need” to protect shoppers from “a number of potential harms”, including the possibility of easily racking up thousands of pounds in debt and spending more money than they can afford.
This morning the government confirmed that services such as Clearpay, Klarna and Laybuy that provide short-term, interest-free financing to consumers will be subject to Financial Conduct Authority rules that require them to carry out affordability checks and treat borrowers fairly.
Buy now, pay later: Providers like Klarna, LayBuy, and Clearpay are set to be regulated
These checks could bring the sector more in line with existing lenders such as credit card and personal loan providers, amid findings from a major bank that 10 percent of customers who used BNPL services in November had already exceeded their overdraft limit.
“We make sure that people are treated fairly and that they only offer agreements they can afford – the same protection you would expect with other loans,” said Chancellor of the Exchequer John Glenn today.
Buy now, pay debt later credit reference agencies are largely underreported at the moment, frustrating incumbent lenders such as banks unable to get a complete picture of consumer borrowing.
This won’t change overnight, but regulation could mean that BNPL credit is likely to become more difficult to obtain if more rigorous tests of affordability and eligibility are introduced, with lenders taking a more detailed look at borrowers’ finances.
Chris Woolard, former interim chief executive of the Financial Conduct Authority (FCA), who wrote the review that found potential risks to consumers, said the new rules “couldn’t come soon enough,” and he hoped government action would come through ” Months, not years.
Formal regulation of these services could come in addition to the Financial Services Bill, which Parliament is currently passing through.
What is buy now pay later?
Buying goods on interest-free credit is not a new phenomenon, but it has grown in popularity in recent years with the emergence of platforms such as Clearpay, Klarna and Laybuy, which are increasingly becoming a staple on the websites of Britain’s most popular high street shops.
They typically allow shoppers to pay for purchases, usually clothing and accessories, but also increasingly higher-value items, in installments over a specified specified period or even a month after they’ve been paid for.
ClearPay, Klarna, and Laybuy are among the most popular platforms, while PayPal has also launched its own “buy now, pay later” service.
Figures from the FCA’s review of the sector found that the value of purchases made in this way more than tripled between January and December 2020 and rose during the coronavirus lockdowns in April and November.
More than one in 10 shoppers have used such services since the start of the pandemic, processing £2.7 billion in spending through 2020.
The FCA review found that “the BNPL overall is about 1 percent of the total credit market, but it has accelerated very quickly to get there and is still growing”.
Previously, they were not covered by regulations since the laws governing consumer credit have not been updated to a large extent since 1989.
They are not covered because the waivers also cover payment plans for dentists and gym membership fees that can be paid in instalments.
The number of orders for buy now, pay later services skyrocketed during the coronavirus lockdown. Regulators estimated that purchases more than tripled between January and December
Why do people worry?
In addition to the sector’s pace of growth, there are concerns about its commercialization, offering, and the age of its user base.
The FCA has estimated that three-quarters of BNPL users are between the ages of 18 and 36.
While many users believe the services can help them budget, structure a payment or make it easier to “try before you buy”, there are concerns about the spirals debt borrowers can get into.
Research from digital financial advisory service Open Money found that some consumers suffered from “buy now, pay later” schemes.
Although these products are often interest-free, even if borrowers can be hit with default or missed repayment fees, the concern is that borrowers can constantly get more and more loans and spend money they can’t afford.
“In theory, it would be relatively easy for a consumer to raise around £1,000 in credit using multiple lenders,” the FCA report said.
She also warned that the platforms’ business models and the way they market themselves to retailers by claiming they can get customers to spend more have created potential conflicts of interest, as they may not have the interests of borrowers at heart.
“Our research found that 77 percent of users struggled to pay back money for purchases made with BNPL,” said Anthony Morrow, co-founder of digital financial advisory service Open Money, which has called for a crackdown on the sector.
“Without proper regulation, these schemes put consumers at risk of serious financial harm, particularly in the current economic uncertainty.”
About 44 per cent of UK adults who financed their Christmas shopping last year through BNPL services, who spent an average of £211, were concerned about their ability to repay, according to a survey released on Monday by Market Comparator.
Klarna insists that less than 1 percent of borrowers default while Laybuy says the default rate is less than 5 percent.
Finally, the way these products are marketed and shown at checkout has caused concern to regulators.
Figures from Market Comparison found that an average of £211 was spent on Christmas gifts using ‘buy now, pay later’ services.
Despite touting it as a younger generations alternative to a credit card, the Financial Conduct Authority (FCA) warned that “some consumers do not view it as credit” and instead view it as debiting, rather than credit card spending, given the ease of making such Purchases. And the way it is presented at the checkout of retailers.
The review found that “there is a risk that consumers may not apply the same level of scrutiny to their decision-making as they do with other credit products, including consideration of the potential consequences of non-payment.”
Already in December service providers were asked to tighten their advertising practices to make it absolutely clear to consumers that what they provide is debt.
What was the reaction?
The reaction from activists and consumer groups has been largely positive. Labor MP Stella Creasy, who unsuccessfully introduced an amendment in Parliament to regulate the sector only a few weeks ago after arguing the BNPL industry could be the next Wonga-style scandal, said the news was “welcome”.
Labor MP Stella Creasy has campaigned for greater regulation of ‘pay later’ companies
She said, “The Financial Conduct Authority (FCA) has confirmed what we have warned the government about over the past year, that the industry’s behavior presents a clear risk to consumers and needs urgent action. Regulation cannot come soon enough and must be an urgent priority.
Mr Moreau said: We have long argued that BNPL schemes make it very easy to take on debt without fully considering how you will pay it back or the implications if you don’t.
Without proper regulation, these schemes put consumers at risk of serious financial harm, especially given the current economic uncertainty.
We are pleased that the FCA has decided to take action.
“The regulations will provide consumers with the same protections they have with other types of credit, including affordability checks before taking out a new loan and support if they later struggle with repayment.”
And what did the platforms say?
Klarna, Britain’s most popular BNPL platform, said in a statement: ‘As a fully licensed bank, Klarna is very comfortable operating in a regulated environment and wholeheartedly supports the regulation of the UK buy-now-pay-later sector.
We agree that regulation has not kept pace with new products and changes in consumer behaviour, and it is now essential that regulation be modern, proportionate and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences.
This is why we welcomed The Woolard Review to change and innovation in the unsecured credit market. We have been fully involved in this process and now look forward to working alongside the FCA, government and wider sector to build a modern regulatory and supervisory framework that delivers the best results for clients.
Gary Rohloff of New Zealand’s Laybuy said: “We welcome today’s review which highlights the benefits of the BNPL sector, as well as the focus on ensuring that the entire industry works in the interest of consumers.
BNPL is an effective and low-risk tool to help people manage their budget. It is important that these products remain available to consumers, the vast majority of whom value BNPL’s services. We therefore welcome the government’s acknowledgment that the sector must retain its ‘essential interest’.
We think we’re already in a good position when it comes to regulation. There must be a balance to protect consumers, but also to ensure that they maintain the innovation and simplicity that consumers value. We will work closely with the regulator and government before the next steps.
ClearPay’s Damien Kasabji said: ‘We welcome today’s recommendations and look forward to working with the FCA, government and stakeholders to build on the consumer protections we already offer to create the right regulation for the sector.
Clearpay’s view has always been that consumers will receive the best services through products designed with strong warranties and industry-appropriate regulations under the supervision of the Financial Conduct Authority (FCA).
“We are pleased that many of the suggestions we made in our submission to the Woolard Review have been acknowledged and that the review has recognized the diverse nature of the industry.”
Some of the links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to influence our editorial independence.