Buy-now-pay-later providers serving UK ecommerce retailers have today welcomed news from the UK government today that the sector is to be regulated by the Financial Conduct Authority.
Providers from Klarna and Clearpay to Laybuy say it is time that regulation, which comes after the sector tripled in size in 2020, was introduced.
The government says the recent Woolard Review into the sector showed potential for harm to consumers who cannot afford to repay credit. As regulated businesses, lenders will in future be required to carry out affordability checks on customers, and ensure that vulnerable shoppers are treated fairly.
The review was commissioned as both online shopping and the uptake of buy-now-pay-later payments have grown quickly during the Covid-19 pandemic. Shoppers used the service three times as often in 2020 as in 2019. The government says that while buy now, pay later provides clear benefits to customers who want to spread their payments, there is now “significant risk” that the interest-free agreements could harm shoppers who cannot afford to buy at all.
John Glen, economic secretary to the Treasury, says: “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. 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.
“Buy-now-pay-later has clear benefits - such as allowing people to manage their finances by spreading the cost of a purchase interest-free – but the Woolard Review found several potential harms which can be mitigated by bringing these agreements into regulation.
“Many consumers do not view interest-free buy now pay later as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer.”
The Woolard review says that although the average transaction tends to be low, shoppers can take out multiple agreements - and it is relatively easy to have £1,000 in debt that credit reference agencies and lenders cannot see. Potential levels of debt are increasing as providers serve higher value retailers or offer finance in-store.
The government now plans for consultation with stakeholders before bringing forward legislation for relegation, that would also mean consumers could go to the Financial Ombudsman Service with any complaints.
Buy-now-pay-later companies operating in the UK include Klarna, Clearpay and Laybuy.
Gary Rohloff, managing director of co-founder of Laybuy, welcomed the review, and says: “I think it’s important to stress that if offered responsibly, credit offers many positive opportunities for consumers. Ever since we started Laybuy, we have set high standards of information and transparency for customers. Today’s report makes clear it is time for the industry to step up.”
He says that the service already works with credit reference agencies and rejects about 25% of those who apply to use the service – which, he says, helps shoppers manage their budgets in a relatively low risk way. Fewer than 5% of customers default, and the company says it works with customers to support those that fall behind.
“We believe we are already in a good place when it comes to regulation,” says Rohloff. “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.”
Damian Kassabgi, EVP public policy at Clearpay says: “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.”
In a statement, Klarna says: “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.”
In a blogpost, Klarna says that it never charges interest or late fees – with the effect that consumers do not build up unexpected levels of debt. It says it assesses eligibility for each transaction, with those who miss payments restricted from using the service.