Any further delay to the regulation of exploitative ‘buy now, pay later’ firms could be catastrophic
No one should be fooled by companies just because they have paid celebrities to be in a TV ad or operate through phone apps, writes Stella Creasy MP. | PA Images
With millions now using these companies and the threat of further redundancies and difficulties on the horizon, regulation of the BNPL industry needs to happen in weeks not months.
This Christmas, millions of people used 'buy now, pay later' products from companies like Klarna and Clearpay to pay for their Christmas shopping. As with drinking that last bottle of eggnog, what can seem like a good idea at the time often ends in a headache. Research shows nearly half of these consumers are struggling to repay their debt.
The BNPL industry is a relatively new entrant to the UK’s crowded consumer credit market but it is one which has exploded during lockdown. Allowing people to spread payments over a period of weeks, it has quadrupled in market size during the pandemic. It now makes up £2.7bn of consumer spending and a whopping 10% of the entire consumer credit market.
Using a regulatory loophole, these companies don’t have to abide by existing consumer credit rules because they don’t charge interest. Instead they make their money from the retailers who pay to use their services because consumers spend 30-40% more than they would have done with other forms of credit.
The pressure exerted on consumers to spend is relentless. In December last year the Advertising Standards Authority upheld my complaint against Klarna’s advertising. They were using social media influencers to encourage consumers who were struggling with their mental health during lockdown to spend money to make themselves feel better.
Too often regulation trails behind financial products and the time lag means that consumers are exploited in the interim – it happened with Wonga and it’s happening again with BNPL
For over a year now we have been urging the government to step in to ensure consumers are protected from unaffordable debts with these companies. Indeed, as they aren’t regulated, consumers who get into difficulty can’t even go to the Financial Services Ombudsman for assistance. This week The Financial Conduct Authority has confirmed our concerns were justified and require urgent action. It cannot come too soon. This month 11% of UK consumers say they have used BNPL - often because of financial distress due to Covid - and up to 10% of them already exceeding their overdraft in the same month as using a BNPL product.
Yet three weeks ago the government rejected a cross party amendment tabled to the Financial Services Bill to regulate these companies. This week they have u-turned and said they will act, but we still don’t know when. With millions now using these companies and the threat of further redundancies and difficulties on the horizon, this regulation needs to happen in weeks not months.
We know this not least from history. Too often regulation trails behind financial products and the time lag means that consumers are exploited in the interim – it happened with Wonga and it’s happening again with BNPL.
The Money and Mental Health Policy Institute has told us that 3 million people with mental health problems have found it harder to control online spending since lockdown — in part due to the design of online retail sites. As we wait for the government to act on these recommendations, retailers who are currently promoting Buy Now Pay later Products which we now know are exploitative – Marks and Spencer, ASOS and BooHoo – could take the first step and remove BNPL from their websites until regulations are in place.
No one should be fooled by companies just because they have paid celebrities to be in a TV ad or operate through phone apps. This is an old-fashioned problem – if credit looks too good to be true, it is.
Regulation may come too late for some of those who indulged on BNPL this Christmas but speedy action now can avert further pain. As Wonga taught us all, the consequence of any further delay could be catastrophic.
Stella Creasy is the Labour MP for Walthamstow.
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