Buy now pay later regulations: What will they mean for consumers?

Borrowers of Britain’s booming £2.7billion ‘buy now, pay later’ industry will soon be able to complain to the Financial Ombudsman Service after it was announced lenders would be regulated under new government plans.

It comes as regulators warn there was 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 could afford.

The Government confirmed this morning that services like Clearpay, Klarna and Laybuy which provide short-term interest-free financing to consumers will be subject to Financial Conduct Authority rules requiring them to undertake affordability checks and treat borrowers fairly.

These checks could bring the sector more in line with existing lenders like credit card and personal loan providers, amid findings from one major bank that 10 per cent of customers who used BNPL services in November had already gone over their overdraft limit.

‘We’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans’, Treasury minister John Glen said today. 

Buy now, pay later debts and applications are largely not reported to credit reference agencies at the moment, which has frustrated existing lenders like banks who are unable to get a full picture of consumers’ borrowing.

This will not change overnight, but regulation could mean BNPL credit could potentially become harder to obtain if tougher affordability and eligibility checks are brought in, with lenders taking a more detailed look at borrowers’ finances.

Former FCA interim chief executive Chris Woolard, who authored the review which found potential risks to consumers, said the new rules ‘could not come soon enough’, and hoped government action would come in ‘months and not years’.

Formal regulation of these services could potentially come in an addition to the Financial Services Bill, which is currently going through Parliament.

What is buy now, pay later?

Buying goods on interest-free credit is not a new phenomenon but has surged in popularity in recent years with the advent of platforms like Clearpay, Klarna and Laybuy, which are increasingly a fixture on the websites of Britain’s best-known shops.

Usually they allow shoppers to pay for purchases, usually clothes and accessories but increasingly higher-value items too, in instalments over a certain fixed period or up to a month after paying for them.

Figures from the FCA’s review into the sector found the value of purchases made this way more than tripled between January and December 2020 and spiked during coronavirus lockdowns in April and November. 

More than one in 10 shoppers have used such services since the start of the pandemic, with an estimated £2.7billion worth of spending processed through in 2020.

‘Overall BNPL is around 1 per cent of the total credit market, but has accelerated very quickly to get there and is still growing’, the FCA’s review found.

Previously, they have not been covered by regulation due to the fact laws governing consumer credit have largely not been updated since 1989. 

They are not covered by due to exemptions which also cover dentists’ repayment plans and sports club membership fees which can be paid for in instalments.

Why are people concerned?

As well as the pace at which the sector has grown, there are concerns about its marketing and presentation and the age of its user base. 

The FCA estimated as many as three quarters of BNPL users were aged 18-36.

While many users believe services can help them budget, structure repayments or make it easier to ‘try before they buy’, there are worries about the spirals of debt borrowers can get into.

Although these products are frequently interest-free, even if borrowers can be hit with default or missed payment fees, the concern is borrowers can consistently take out more and more loans and spend money they can’t afford.

‘In theory, it would be relatively easy for a consumer to amass around £1,000 of credit using multiple lenders’, the FCA’s report said. 

It also warned that platforms’ business models and the way they market themselves to retailers by claiming they can get customers to spend more created a potential conflict of interest, as they may not have borrowers’ best interests at heart.

Anthony Morrow, the co-founder of digital financial advice service Open Money, who has called for a crackdown on the sector, said: ‘Our research found that 77 per cent of users have struggled to pay back the money for purchases made using BNPL. 

‘Without adequate regulation, these schemes are putting consumers at risk of serious financial harm, especially in the current economic uncertainty.’

Some 44 per cent of UK adults who funded their Christmas shopping last year through BNPL services, spending an average of £211, were concerned about their ability to repay it, according to a survey released on Monday by Compare the Market.

Klarna insists fewer than 1 per cent of borrowers default while Laybuy says its default rate is below 5 per cent.

Finally, the way in which these products are marketed and displayed at checkouts has caused concern for regulators.

Although described as younger generations replacement for the credit card, the FCA warned that ‘some consumers don’t view it as credit’ and instead viewed it as debit, rather than credit card spending, due to the ease with which such purchases can be made and the way in which they are presented at retailers checkouts.

‘There is a risk that consumers may not apply the same level of scrutiny to their decision-making as they would for other credit products, including consideration of the potential consequences of failing to repay’, the review found.

Providers in December were already told to tighten up their advertising practices to make it completely clear to consumers that what they were offering is debt.

What was the reaction?

Reaction from campaigners and consumer groups was largely positive. Labour MP Stella Creasy, who unsuccessfully tabled an amendment in Parliament to regulate the sector only a few weeks ago having argued the BNPL industry could be the next Wonga-style scandal, said the news was ‘welcome’.

She said: ‘The FCA has confirmed what we have been warning the Government of for the past year, that the behaviour of the industry presents a clear risk to consumers and needs urgent action. Regulation cannot come soon enough and needs to be an urgent priority.’

Mr Morrow said: ‘We have long argued that BNPL schemes make it very easy to take on debt without fully thinking about how to pay it back or the implications if you don’t. 

‘Without adequate regulation, these schemes are putting consumers at risk of serious financial harm, especially in the current economic uncertainty.

‘We are delighted that the FCA has decided to take action. 

‘Regulation will offer consumers the same protection they have with other types of credit, including affordability checks before taking on a new loan and support if they subsequently struggle with repayments.’

And what did the platforms say?

Klarna, Britain’s best-known 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 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 is modern, proportionate and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences.

‘This is why we welcomed Woolard Review into change and innovation in the unsecured credit market, we have fully engaged in this process and we now look forward to working together with the FCA, government and the wider sector to build a modern regulatory and supervisory framework that delivers the best outcomes for customers.’

New Zealand-based Laybuy’s Gary Rohloff said: ‘We welcome today’s Review that highlights the benefits of the BNPL sector, and also the focus on ensuring the entire industry works in the interest of consumers.

‘BNPL is an effective and lower-risk tool to help people manage their budget. It’s important that these products remain available for consumers, the vast majority of whom value BNPL services. We therefore welcome the Government’s recognition that the sector must retain its “fundamental utility”.

‘We believe we are already in a good place when it comes to regulation. There needs to be a balance to protect consumers, but also make sure it retains the innovation and simplicity ​that consumers value. We will work closely with the regulator and the Government ahead of the next steps.’

And ClearPay’s Damian Kassabgi said: ‘We welcome today’s recommendations and look forward to working with the FCA, the government and stakeholders to build on the consumer protections we already provide to create the right regulation for the sector.

‘It has always been Clearpay’s view that consumers will be best served by products designed with strong safeguards and appropriate industry regulation with oversight from the FCA.

‘We are pleased that many of the suggestions we put forward in our submission to the Woolard review have been acknowledged and that the review has recognised the diverse nature of the industry.’