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‘Buy Now Pay Later’ Lenders Klarna and Clearpay Are Facing A Government Crackdown After Harm Warnings

Companies such as Klarna offer interest-free instalment plans for online purchases (PA)

4 min read

The government has announced a crackdown on ‘Buy Now Pay Later’ (BNPL) services such as Klarna and Clearpay that allowshoppers to pay for the purchase in interest-free installments.

A new report concluded that the products offered via many major fashion retailers, including online giant ASOS, posed a “significant potential for consumer harm”.

According to the review commissioned by the Financial Conduct Authority (FCA), the use of BNPL products almost quadrupled in 2020 with over 5 million people using them since the start of the pandemic for total sales of £2.7 billion.

The review found, however, that one in ten customers of a major bank using BNPL were already in arrears, and that many shoppers had quickly accrued debts of over £1,000. 

Data provided to the authority suggests that the products overwhelmingly target young women,
with 25% of users aged 18-24 and 75% female.

Chistopher Woolard, former interim chief executive of the FCA and chair of the review, said that changes to current legislation to ensure BNPL was regulated was “urgently needed”.

“Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone,” 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.”

The Treasury has since announced its intention to improve regulation of BNPL lenders by bringing them under the remit of the FCA, with legislation set to be brought forward “as soon as parliamentary time allows. 

This will mean that firms will be required to undertake affordability checks before lending and ensure vulnerable consumers are treated fairly.

“Buy-now-pay-later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular,” said John Glen, economic secretary to the Treasury.

“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 decision has been welcomed by campaigner Alice Tipper, who launched a petition in June 2020 calling for BNPL to be regulated to protect young consumers.

“The objective was never to suggest that these products were all bad and couldn't be useful for some consumers,” she explained. 

“It was the hundreds of people who shared their story with the campaign who made it painfully clear that the absence of regulation is at the expense of consumers, particularly those who are young and vulnerable.”

Ms Tipper warned, however, that failure to legislate quickly could lead to more harm for vulnerable consumers.

“Today, BNPL is often a teenager's first encounter with credit. It is reassuring that the FCA has identified the need for action and I'm delighted by Mr Woolard's recommendations. Regulation means consumers will receive the information and protection they deserve,” she said. 

“The FCA and Government now need to act fast to bring these recommendations into fruition. As Mr Woolard highlights, this is an urgent issue and there is no time for delay.”

“We cannot see another Wonga where slow regulation is at expense of vulnerable consumers.”

The government faced criticism in January after it voted down an amendment to the Financial Services Bill backed by 70 MPs which called for BNPL firms to be regulated. 

Commenting on today’s announcement, Labour MP Stella Creasy, who tabled the Wonga amendment, said: ‘‘The FCA has confirmed what we have been warning the government of for the past year — that the behaviour of the BNPL industry presents a clear risk to consumers and needs urgent action. 

“The ministers' U-turn on tackling these companies is welcome and now needs to be an urgent government priority — with evidence millions used this form of credit to pay for Christmas, regulation cannot come soon enough. 

Creasy echoed Ms Tipper’s concerns that a slow response to the FCA’s review could be as “catastrophic for personal debt” as Wonga.

Payday lender Wonga collapsed into administration in 2018 four years after the FCA found that its debt collection practices were unfair and ordered it to pay £2.6 million to compensate 45,000 customers.

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