Buy Now, Pay Later Firms to Face FCA Regulation

Firms that allow consumers to spread the cost of online purchases across weeks or months will face oversight from the Financial Conduct Authority (FCA), the Treasury has announced, amid concerns that they could be contributing to a debt crisis among young people.

Bringing these firms under FCA regulation would require them to conduct affordability checks before lending and ensure borrowers are treated fairly if they’re struggling to repay the loans. It would also give customers the right to take complaints about the services to the Financial Ombudsman Service.

Buy now, pay later (BNPL) agreements allow customers to stagger or delay payments for goods, at no additional fee or interest—until they miss payments.

The popularity of these services, which include Clearpay, Laybuy and industry leader Klarna, exploded during the pandemic, with five million customers arranging £2.7 billion of buy now, pay later (BNPL) agreements in 2020—quadruple the amount arranged in 2019. It’s estimated that £4 in every £100 spent currently spent in the UK is channelled through BNPL schemes.

The model is especially popular with younger consumers, particularly women, who are encouraged to enter the agreements on fashion sites such as Asos, Missguided and Boohoo. 

Politicians and campaigners have raised concerns that these agreements, easily entered on the checkout pages of popular shopping sites, are encouraging consumers to spend more than they can afford, leaving them at risk of spiralling debt and in some cases damaged credit scores.

Last month, a cross-party group of more than 70 MPs, led by warned that BNPL could be “the next Wonga waiting to happen,” referring to the controversial payday lender, which sold thousands of customers loans they couldn’t afford. 

Labour MP Stella Creasy said: “The lesson from Wonga is the longer we take to act, the more people get into unaffordable debt. It’s not by accident that these companies make money from people sending more than they can afford.” She urged the government to take urgent action to regulate the sector.

Late last year the regulator undertook a four-month review of the unsecured credit sector, led by former FCA interim chief executive Chris Woolard. It discovered that consumers can easily rack up debts of £1,000 using the services and one in ten people using them already have debt arrears elsewhere.

The Woolard review also uncovered the runaway popularity of the services among Millennial and Generation Z shoppers. Half of all users are between ages 25 and 36, while another quarter are 24 or younger. 75% of users are women and 90% of transactions involve clothing or footwear.

Woolard said that while buy now, pay later is convenient for some consumers, it’s also "a really easy way to fall into problem debt.”

The report concluded that the sector should face tougher regulation, including being required to undertake proper affordability checks and to ensure customers, particularly those who are struggling to repay loans or are vulnerable, are treated fairly.

In response to the report, the Treasury said the FCA will likely be given formal oversight of the sector from later this year, following a consultation and legislation.

John Glen, economic secretary to the Treasury, said: “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 buy now, pay later 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.”

Klarna said: “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.”

However, Gary Rohloff, managing director and co-founder of Laybuy, said the company, with 400,000 users in the UK, is “already in a good place when it comes to regulation.”

“There needs to be a balance to protect consumers, but also make sure it retains the innovation and simplicity that consumers value,” he added.