‘Buy now, pay later’ firms like Klarna and Clearpay will now be regulated by the financial watchdog amid fears young shoppers are falling into huge debts
- Buy now, pay later schemes will face tighter regulation from the City watchdog
- Services allow customers to pay for their shopping in monthly installments
- It lets shoppers spread costs without resorting to expensive borrowing
- But review of sector has found that young people ‘easily accrue large debts’
- Financial Conduct Authority vowed to bring burgeoning sector under control
Buy now, pay later schemes will face tighter regulation from the City watchdog to stop millions of young shoppers racking up huge hidden debts.
The Financial Conduct Authority (FCA) today said bringing the sector under stricter control was a ‘matter of urgency’ after a review of the unsecured credit market found the scheme could ’cause harm to consumers’.
Many high-street retailers including Marks & Spencer and H&M, and online shops such as Asos, offer the services, which let customers pay for their shopping in monthly instalments interest-free in order to spread the cost.
Though they stop shoppers from turning to expensive borrowing, the schemes potentially encourage people to spend more than they had planned and accruing debts that they cannot pay back.
The use of buy now, pay later schemes, provided by firms like Klarna and Clearpay, nearly quadrupled in 2020 as the pandemic drove online shopping. At Christmas, one in four shoppers used £2.3billion of ‘buy now, pay later’ credit to pay for their festive shopping.
However, a review of the market by Christopher Woolard recommended bringing interest-free buy now pay later into FCA supervision after finding it was ‘relatively easy’ for shoppers to accrue debts of around £1,000 that credit reference agencies and mainstream lenders cannot see.
Today the government announced that providers will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.
The move was praised by groups including Which?, MoneySavingExpert, Citizens Advice and StepChange. Alice Tapper, the founder of a Go Fund Yourself campaign which called for regulation, said she is ‘delighted’ that the issues were being dealt with.
The use of buy now, pay later schemes, provided by firms like Klarna and Clearpay, nearly quadrupled in 2020 as the pandemic drove online shopping
How do buy now, pay later schemes work?
Buy now pay later schemes allow shoppers to buy something without having to pay for it until a later date.
If customers repay the price of goods they bought within a ‘delay period’, they will not pay any interest.
Shoppers who use the scheme carefully could delay paying for something for several months, or even a year, and not pay any interest.
Many big firms will not charge people any interest if their balance is cleared before the ‘delay period’ ends.
This type of financing has existed for years, but recently some companies have popularised it with younger consumers through celebrity influencing and TV shows.
Although the schemes are meant to prevent customers from borrowing expensively, there are serious risks to buy now, pay later – including the accruing of large debts.
If customers do not, cannot or forget to make all of the repayments within a ‘delay period’ – anywhere between 30 days, over three installments or up to a year – their debts are referred to a collection agency.
If people miss a payment, they are advised to contact their lender to explain their situation and to avoid taking out more credit unless they know they can afford to pay it back.
John Glen, Economic Secretary to the Treasury, said: ‘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.’
The Woolard Review, chaired by the former interim chief executive of the FCA Christopher Woolard, found that though the schemes give consumers a significant alternative to more expensive credit, it puts them at risk of getting into debt.
For example, more than one in 10 customers of a major bank using buy now, pay later were already in arrears.
The 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.
Although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers – and the review found it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see.
With several providers planning to expand to higher-value retailers, or offer their products in-store, the risk that consumers could take on unaffordable levels of debt is increasing, the government said.
Regulation will offer customers a level of protection, such as being able to report the scheme to the Financial Ombudsman if something goes wrong.
A consultation will take place before legislation is brought forward to ensure the approach to regulating buy now pay later firms is proportionate.
Mr Woolard 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.’
An Instagram influencer campaign that encouraged customers to use credit to ‘buy now, pay later’ to cheer themselves up during the lockdown has been banned.
The UK’s Advertising Standards Authority has banned Swedish bank Klarna’s ‘irresponsible’ campaign after receiving a complaint from Labour MP Stella Creasy.
In April the bank hired four influencers on Instagram to encourage their followers to use Klarna’s services to ‘boost their mood’.
An Instagram influencer campaign that encouraged customers to use credit to ‘buy now, pay later’ to cheer themselves up during the lockdown has been banned
Klarna claims that the adverts were intended to simply encourage customers to take care of themselves during the lockdown period and boost mental health.
Influencers Bradley Harper, Claire Menary, Aisha Master and Yasmin Fatollahy told the watchdog their posts were about the uplifting effects of products rather than shopping with Klarna.
The ASA said: ‘We acknowledge that purchasing non-essential items was likely to be a source of comfort for some people during the national lockdown. However, each ad promoted the use of Klarna’s deferred payments services.
Klarna allows customers to pay for products in instalments with no fees or interest and has more than 10million customers in the UK
In April the bank hired four influencers on Instagram to encourage their followers to use Klarna’s services to ‘boost their mood’
Influencers Bradley Harper, Claire Menary, Aisha Master and Yasmin Fatollahy told the watchdog their posts were about the uplifting effects of products rather than shopping with Klarna
‘We concluded that in the context of the challenging circumstances caused by the lockdown at the time, including impacts on people’s financial and mental health, the ads irresponsibly encouraged the use of credit to improve people’s mood.’
A Klarna spokesman said: ‘We are of course disappointed in this decision and have removed the four posts highlighted by the ASA.’
Reality stars and Instagram celebrities have been blasted for plugging the schemes to their young followers on social media without outlining the risks, while parents were warned not to use the service to buy Christmas presents over fears they would not be able to repay the costs.
A spokesperson for Klarna said that as a licensed bank, it was ‘very comfortable operating in a regulated environment and wholeheartedly supports further 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,’ it said.
‘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.’
Martin Lewis, founder of MoneySavingExpert.com, told MailOnline: ‘There has been an explosion of buy now, pay later (BNPL) lending over the last few years, often targeted at young people, pushed via Instagram and social media, as if it is a form of lifestyle therapy. It isn’t. It’s debt.
‘In fact, it’s the fastest-growing form of credit in the UK and regulation is crucial.
‘For years, I and others made similar calls about payday loans – they too were purported to be ‘filling a gap’, and about ‘technology, not borrowing’ – and the sloth-like delays to dealing with that led to financial nightmares for millions.
‘That’s why I strongly support regulation, and regulation at speed. BNPL isn’t as bad as payday lending – done right, used right, it’s interest-free. Indeed, it can be a useful tool.
‘However, it’s been sold to retailers as an easy way to get people to spend more – this, combined with the younger demographic who use BNPL, is a massive red flag.
‘Regulation isn’t about killing the industry, it’s about putting controls on product design and marketing, to ensure that over-borrowing doesn’t ruin lives, and that consumers are treated fairly.
‘And most importantly for me, it means people would have a right to take any complaints to the free and independent Financial Ombudsman Service.’
Gareth Shaw, Head of Money at Which?, said: ‘We’ve highlighted how the Buy Now, Pay Later market can encourage some people to spend more than they can afford, so regulation to protect consumers from building up large debts that they will struggle to pay off is clearly required.
‘As Buy Now, Pay Later services continue to surge in popularity at a time when people’s finances are under significant pressure, there is no time to lose.
‘New rules covering this type of lending must be introduced as soon as possible to ensure action can be taken if firms are treating customers unfairly.’
StepChange’s Director of External Affairs Richard Lane told MailOnline: ‘This report identifies multiple ways that the regulator can help the credit market to improve to benefit consumers, and we’re particularly pleased to see a focus on how debt problems should be addressed – and avoided.
‘If the pandemic has shown us anything, it’s revealed that it’s not only our health that is vulnerable to sudden shocks – our finances are too.
‘Chris Woolard’s recommendations on how the FCA should reflect the lessons learned from this period and apply them to future consumer protections show insight and clarity.
‘We very much look forward to working with the FCA to act on these recommendations, and especially to improve the practical steps that can be taken to reduce debt problems in the UK.’
It follows research which found that one in four shoppers used firms such as Klarna, which has formed partnerships with hundreds of household name retailers, in the run up to Christmas.
Shoppers spent an average of £170, which it is claimed represented nearly 40 per cent of all Christmas shopping. The research, by credit reporting firm Credit Karma, also found that young people were the most common users of buy now, pay later.
The firms have been accused of tempting people – especially younger adults – into getting into debt by spending money they don’t have.
Figures previously released by debt solution provider Financial Wellness Group said it was increasingly common for people in debt to such schemes to come to it for help.
Student, 21, issues warning over ‘buy now, pay later’ firms after late payments cut her credit score by HALF – as a debt charity urges companies to be more transparent with customers
A student has issued a warning over ‘buy now, pay later’ firms after her online shopping habits crippled her credit score.
Erin Phillips, 21, who lives in the UK, claims she saw her credit score cut by half after missing payments with online payment service Klarna, which is used by a number of major retailers including ASOS, H&M and Topshop.
‘Buy now, pay later’ companies give customers the option to pay for online purchases after the fact, either in a single lump sum or in installments spread across a period of time.
The flexibility has made Klarna and other ‘buy now, pay later’ services like Clearpay (used by M&S, Urban Outfitters and Boohoo) and Afterpay (Bare Minerals, Fenty Beauty, Forever21) a hit with customers.
Warning: Erin Phillips, pictured,claims she saw her credit score cut by half after missing payments with online payment service Klarna, which is used by a number of major retailers
However debt charity Stepchange warned customers are not always made fully aware of the ‘commitments and consequences’ of using these services, which can include credit checks and involvement of debt collection agencies, and called for greater transparency.
Speaking to the BBC, Erin told how she used Klarna, based in Sweden, to spread out the cost of buying new clothes online.
Problems arose when she missed several payments and eventually led to Erin’s credit score being cut by half. The student insists she was not made fully aware of the risks associated with missing payments.
Erin said: ‘All they [the company] say is you’ve missed a payment, and you have one extra week. There’s not much information in them really.’
Klarna did not comment on Erin’s individual case but said the debt is only passed to a debt collection agency if the debt remains unpaid after ‘several months’, during which time the customer is contacted ‘repeatedly’ and asked for repayments.
Erin, who is otherwise an organised and fiscally responsible student, added: ‘I was quite naive, and I didn’t think these little purchases would affect me so much, usually between £20 and £80. If I had known, I would have just used my credit card.’
Klarna offers customers different payment plans to customers.
Its most popular is the ‘pay later’ product, which gives customers 30 days to pay for their purchase from the date it is shipped. Some retailers opt for a 14-day period.
Klarna promises customers: ‘No interest. No fees. Ever.’
The option is attractive to online shoppers as they can order items to try at home and return the item within 30 days without paying anything.
As the Klarna website explains, it puts an end to ‘waiting around for refunds’.
Another option is interest-free instalments, which allows customers to pay for a purchase in three even, interest three instalments. A payment is taken on the day on the order is shipped, and every 30 days after that.
Flexible payment options lead to customers spending more on average, making firms like Klarna, Afterpay and Clearpay attractive business partners for retailers.
The flexibility has made Klarna and other ‘buy now, pay later’ services like Clearpay (used by M&S, Urban Outfitters and Boohoo) and Afterpay (Bare Minerals, Fenty Beauty, Forever21) a hit with customers. Pictured, an advert on Klarna’s Instagram page promoting its service
However Stepchange claimed customers are not being made aware of the full extent of the consequences of missed or late payments and called for greater clarity upfront.
The charity said this is of particular concern as ‘buy now, pay later’ is particularly prevalent among retail brands popular with young people’.
Sue Anderson, head of media at Stepchange said: ‘For some time we have been expressing concerns about the transparency to consumers on the commitments and consequences involved in using ‘buy now, pay later’ services.
‘The potential consequences of being unable to pay are not always clear at the outset, and at a time when consumers may be more focused on the underlying product than the financial agreement it’s particularly important the service provider makes the nature of their commitment very clear.
‘Given that buy now, pay later is particularly prevalent among retail brands popular with young people – who are increasingly overrepresented among StepChange clients – care needs to be taken they are not being encouraged to take on credit they cannot afford.
‘We’d like ‘buy now, pay later’ providers to ensure they give clear, comprehensive information to customers. We would also encourage the regulator to keep a close eye on how well consumers understand the types of services they’re being offered at the online checkout – especially those that could have the potential to see them build up debt.’
Luke Griffiths, UK General Manager of Klarna said in a statement: ‘We are very clear about the terms of our pay 30 days later product, which allows shoppers to try before they buy, and is a form of invoice. Customers have up to 30 days to pay for their goods after they are shipped, with no interest or fees.
‘It wouldn’t be responsible for us to lend to everyone, every time – so we do eligibility and affordability assessments, including a soft credit check (which does not impact a customer’s credit score), to ensure customers who choose to pay later can use our product in a safe and sustainable way, and they have the ability to repay. Because it’s a soft credit check, whether they are accepted or declined, it will not show up on their credit record.
‘If they do not pay after 30 days, we reach out to them repeatedly over a period of several months to ask for repayments. If the debt remains unpaid after several months, we will refer it to a debt collection agency.
‘A customer’s credit score will only be impacted if the debt remains unpaid beyond this point – and this is made clear in our communications. However, we work closely with our customers to try and make sure this doesn’t happen. During this process no interest or late fees will be charged, ever.
‘We have a dedicated team in place to support the very small minority of our customers who fall into financial difficulty.‘
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