Buy-now-pay-later company Klarna first offered British shoppers the opportunity to defer payment at checkout in 2014, when it launched in the UK.
However, after seven years, regulation is only now on the table after five million people spent billions of pounds using fast and easy loans last year.
Consumer activists have spent months calling for a crackdown amid fears that shoppers are being encouraged to spend more than they can afford.
Finally, the FCA is cracking down on buy-now-pay-later companies like Klarna that have proven popular with young shoppers in lockdown mode.
Finally, the Financial Conduct Authority (FCA) yesterday announced plans to regulate the industry, but warned that it could take months.
It comes as buy-now-pay-later purchases nearly quadrupled in the last year to £2.7bn as online shopping soared in lockdown.
Online exit loans are now being advertised by retailers and there are concerns that their presence in fashion stores is having an unhealthy effect on young women in particular.
An FCA review published yesterday found that one in ten customers of a large bank were already in debt when they were allowed to buy something using buy now, pay later.
It also found that 25 percent of borrowers are between the ages of 18 and 24 and 50 percent are between the ages of 25 and 36. The figures showed that three-quarters of customers are women and nine out of ten transactions relate to fashion or shoes.
The loans are interest-free, but some lenders charge late payment fees and customers who fall behind can face demands from debt collectors.
The FCA also found that there were spikes in buy-now-pay-later usage associated with the April and November Covid-19 lockdowns.
Shoppers told the city watchdog they assume the services are regulated. One said: ‘You take them for granted [financial service providers] It is organized.
The report also reveals that some lenders have told retailers that their services can boost sales by 30 percent.
While the average amount borrowed for purchases could be as high as £65, the report revealed that it would be “relatively easy” to pool debt through multiple lenders.
And as lenders seek to expand to higher-value retailers, the government says the risk that consumers may take on unsustainable debt is increasing.
An FCA review published yesterday found that one in ten customers of a large bank were already in debt when they were allowed to buy something using buy-now-pay-later
Christopher Woolard, at FCA, says: “If you look at the scale of the growth, there’s a really urgent need to make sure that this market has the right boundaries put around it and consumers protected.”
He says the lack of information companies had on their customers meant they were “virtually blind”. “It’s very easy for a consumer to earn around £1,000 or so without putting in a lot of effort,” he adds.
One shopper told FCA researchers that the express checkout service reminded him of an “Amazon Buy Now” button. The Treasury confirmed that it would have to hold a consultation before the lenders could be regulated, and would put forward legislation “as soon as Parliament’s schedule allows”.
Once new laws are passed, lenders will have to run credit checks before disbursing loans.
Why should we act now?
Economic Secretary to the Treasury John Glenn
by John Glenn, Economic Secretary to the Treasury
The pandemic has been particularly hard on young people.
At a time when they should be building their future, they find themselves more vulnerable to furlough and facing a tough job market.
They are also more at risk of getting into financial trouble. A recent study found that people under the age of 30 are at least five times more likely to be in debt than those over 50.
So the rapid rise in innovative new buy now pay later products is well worth checking out.
Buy-now-pay-later has become a regular option for consumers during the pandemic as online shopping shifts.
It is particularly popular with young people, many of whom are attracted to it because it is interest-free over traditional forms of credit, such as credit cards.
However, when a shopper can make multiple buy-now-pay-later arrangements with different providers, checkouts can soon become unmanageable, penalty fees can rack up and their credit score may suffer.
Because these products are not regulated, consumers lack many of the protections they might have with other types of credit.
Last September, Christopher Woolard was asked by the Financial Conduct Authority to look into buy-now-pay-later as part of a review of the unsecured credit market.
His report, published yesterday, found that some are encouraged to make rash decisions by often ambitious buy-now-pay-later advertisements and they don’t consider the risks of not being able to pay properly.
As buy-now-pay-later providers begin partnering with higher-value retailers selling more expensive products such as electrical appliances and household items, and move into physical stores, there is a risk consumers may run into problems in the future.
We must act now to ensure that the people who use these products are properly protected, especially young people at the start of their financial journey.
I want to be clear: regulation does not mean prohibition.
Innovation must be encouraged – it is one of the UK’s strengths and will propel us outside the EU.
But if we are to reap the benefits of innovative new financial services, we need adequate safeguards against unsustainable debt — and in the case of buy now, pay later, regulation is the answer.
Customers will also be able to file a complaint with the Financial Ombudsman Service.
Meanwhile, experts call for faster action to prevent more unnecessary debt.
Buy-now-pay-later providers have been around in the UK for years, and such is the case with the regulator struggling to keep up with what are essentially tech companies, says personal finance expert Alice Taber, who has been organizing the campaign for eight months. . “.
‘The FCA has confirmed what we warned the government about last year – that the buy-now-pay-later behavior of the buy-now-pay-later industry is a clear risk to consumers and needs urgent action,’ says Labor MP Stella Creasy, who has long advocated for industry regulation.
Sarah Coles, of investment firm Hargreaves Landsdown, says: “We have waited long enough to give our borrowers the protection they need, and we cannot afford to delay any longer. The speed at which the industry is growing means waiting a few months for decisive action that will expose thousands more young people to non-debt risk.” the organization.
However, experts also stress that the new rules will not help customers who have spoiled their finances by buying now, paying later.
“Unfortunately, some borrowers will be loaded with a lot of debt, and the new regulations will not help them,” says Laith Khalaf, investment broker AJ Bell. “It is right that providers are regulated, but unfortunately for some, the damage has already been done.”
Shopper Kira Lewis is now struggling to keep up with Klarna payments. “They say your credit score won’t be affected,” says the student, 20, “but mine was because I had to go overdraft and use my credit card to keep up with payments.”
Woolard says the regulator acted quickly after the industry boomed last year. This is in part a preventative measure, he says. We’ve seen some really rapid growth in the market and I think it’s absolutely right to step in now and get that under control.
The move to regulate the industry comes just months after Money Mail reported how four social media stars working for Klarna were under investigation for selling check-out credit as a mood booster in the pandemic.
The Advertising Standards Authority later banned the posts – deciding they irresponsibly encouraged incurring debt. Klarna admitted she “missed the mark” in the influencer post.
Buy now, pay later companies welcomed yesterday’s regulation announcement.
Klarna, which has eight million customers in the UK, says it “wholeheartedly supports regulation of the buy-now-pay-later sector in the UK”.
“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,” says a spokesperson.
f.parker@dailymail.co.uk
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