Buy now regret later – FCA to regulate buy now pay later firms

Buy now pay later firms accused of targeting young people and making debt seem ‘cool’

The Financial Conduct Authority (FCA) today announced that firms such as Klarna will face being regulated for the first time, amid fears that their products are aimed at young people and enabling users to rack up debts they can’t afford.

Buy now pay later services are now offered through the majority of major retailers, with some offering a variety of different companies at the checkout point of their website. These services allow people to split payments instantly, are interest free and are used by millions of people.

The FCA, however, has said that these services make it easy to build up ‘unseen’ debts of £1,000+.

As a result, it has decided to regulate the sector, after the value of services rose by nearly 400% last year, with over five million people using them, accounting for £2.7bn of sales.

This is despite the fact that an FCA review into these services found that one in ten people using them already had debt arrears elsewhere.

John Glen, the Economic Secretary to the Treasury said, “By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”

The leader of the FCA’s review that recommended regulation, Chris Woolard, said that although for some people buy now pay later was just a convenience, for some people it’s “a really easy way to fall into problem debt”.

Under the new plans that the FCA has unveiled, providers will need to undertake affordability checks before lending and ensure that customers were treated fairly, particularly if they are vulnerable or struggling with repayments.

Following the consultation, the government has promised to legislate as soon as possible.

With over 10 million customers in the UK, the UK Head of the Swedish company, Klarna, Alex Marsh, has accepted that now is the correct time to regulate the sector. He said that the company tried to work with people who missed payments and fell into debt, but ultimately, missed payments would likely be sent on to debt collectors.

How does buy now pay later work?

The largest of the operators are Klarna, Clearpay and LayBuy. They allow people to choose – both online and in shops, at physical checkouts – to pay for items they’re buying in instalments, or in some cases, even defer payments for up to a month.

Because of the nature of the online stores upon which they first appeared, coupled with the ability they give users to try before they buy or return for much less than buying the item outright, buy now pay later services have proven particularly popular with young people. It’s also believed that the pandemic and its effects on internet shopping have led to a rise in the use of these services. It’s estimated that, currently, £4 in every £100 spent in the UK is spent using buy now, pay later.

Making debt cool

It’s been argued by debt charities and campaigners that the use of social media channels and influencers to market buy now, pay later services has enabled the companies to ‘glamourise’ debt.

Furthermore, it’s been suggested that using the services can make it too easy to fall into debt, and – while the total debts aren’t usually very large – the carry the same risks as any other unaffordable borrowing.

Buy now, pay later companies don’t charge interest, they instead charge a fee to retailers (with some promising they can boost sales by up to 30%) and some charge late payment fees to customers. They also argue that they are more ‘payment providers’ than credit companies. As such, they haven’t previously fallen under the same level of regulation that other credit companies.

Debt is a wider issue

The Woolard Review – which is the wider report into the buy now, pay later sector, carried out by Chris Woolard – made a number of proposals to try and help people who are facing problems with debt and financial difficulty, particularly as a result of the pandemic.

These recommendations included:

• More funding for free debt advice services.
• Long term support for those struggling to keep up with payments due to the fall out of covid.
• Reform of regulation in the community lending and credit union sector, to offer alternatives to high-interest, expensive short-term debt.
• A review of repeat lending that could leave borrowers in difficulty.

He said, “New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty.”