The government has announced plans to regulate interest-free buy-now-pay-later credit agreements by giving the Financial Conduct Authority (FCA) authority to protect consumers.
The move comes after a government review of the unsecured credit market, led by Christopher Woolard, found potential for harm and recommended bringing interest-free buy-now-pay-later into FCA supervision.
John Glen, economic secretary to the Treasury, said in a statement: “Buy-now-pay-later can be a helpful way to manage your finances but there is a real risk that consumers could be harmed as these agreements become ever 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 proposed regulations would mean that buy-now-pay-later firms such as Klarna and Clearpay, available on retailers including Asos, Boohoo, Next, Nike and PrettyLittleThing, would be required to carry out affordability checks on customers and ensure the vulnerable are treated fairly.
“Buy-now-pay-later products are rapidly increasing in popularity, with the volume of transactions tripling in 2020 as the pandemic drove online shopping, and there is now a significant risk that these agreements could cause harm to consumers,” added the government.
Government plans to legislate interest-free buy-now-pay-later products
The plans to legislate to bring interest-free buy-now-pay-later into regulation means that people continue to benefit from these products with the right protections, such as being able to escalate complaints to the Financial Ombudsman.
The review found that 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 that it would be relatively easy to accrue around 1,000 pounds of debt that credit reference agencies and mainstream lenders can’t see.
It added that regulation was needed now as several buy-now-pay-later providers are planning to expand to higher-value retailers, or offer their products in-store, and that offers extra risks to consumers and means they could take on unaffordable levels of debt.
The government has said that legislation will be “brought forward as soon as parliamentary time allows” and that it will consult with stakeholders to ensure the approach to regulating buy-now-pay-later is “proportionate”.
Klarna launches campaign to celebrate consumers and support regulations
This announcement comes weeks after Klarna launched a campaign championing consumers who they state are managing their spending responsibly while supporting regulation and challenging common stereotypes.
Klarna, which has more than 200,000 retail partners, has released a series of eye-catching billboards highlighting what it calls popular fallacies and social stereotypes, including, “Pink is for girls” and “Millennials are useless with money”.
In the context of the current debate surrounding the regulation of buy-now-pay-later products, Klarna uses this campaign to confirm its support for further regulation to better protect consumers, with a billboard which states, “Let’s make regulation fit for today. Consumers want to bank, pay and shop in innovative and new ways. And we want what’s best for them.”
Commenting on its latest campaign, Klarna head of UK marketing, AJ Coyne, said in a statement: “Consumer preferences and shopping habits are constantly evolving, yet stereotypes and common, incorrect assumptions appear to be stuck in the dark ages. Our latest campaign sets out to challenge these beliefs and to champion our customers - from Millennials to Gen Xers.
“We recognise that our customers don’t need nor want to be labelled, they need responsible solutions which protect them when shopping. At Klarna we are proud to provide that support and will continue to innovate and develop to keep up with our dynamic and diverse customers.”
Images: courtesy of Klarna