FCA to crack down on “Buy now, pay later” market

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The logo of Swedish payment provider Klarna. Photo: Thomas Trutschel / Photothek via Getty Images

The UK financial watchdog has been called on to urgently bring the ‘buy now, pay later’ credit market under control, which has exploded during the pandemic.

The Financial Conduct Authority (FCA) published the Woolard review on the unsecured credit market on Tuesday. The 68-page report, written by the former chief executive of FCA, makes more than 20 recommendations on how to reform the unsecured loan market, including a call to “urgently” begin to regulate “buy now,” pay later ‘(BNPL) credit providers. .

The government quickly responded by saying it would give FCA new powers to control the market.

Watch: Should I pay off my debts or save money during the coronavirus pandemic?

“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 hardship,” said Christopher Woolard, former director FCA Acting General and FCA President. the article.

“Changes are urgently needed: getting BNPL to regulate to protect consumers; ensure that there is a secure provision of debt counseling to help anyone who may need it; and maintain a sustained regulatory response to the pandemic. “

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BNPL products allow consumers to purchase a product online by filling in minimal details online, such as phone number and email address. They then make future installment payments to reimburse the cost. Popular providers include Swedes Klarna and ClearPay, both of which work with brands like Asos (ASC.L) and Boohoo (BOO.L) and Australian Afterpay.

BNPL usage quadrupled in 2020, according to the Woolard Review, from almost nothing to around 1% of the UK credit market. More than 5 million people have used this type of payment plan since the start of the COVID-19 pandemic and the market is now worth £ 2.7 billion ($ 3.7 billion). BNPL providers generally do not charge interest, which means they are not covered by current credit regulations.

Service providers claim that their interest-free payment plans make it easier for consumers to manage their money. However, campaigners fear the BNPL deals mean consumers can lose track of how much they owe and contribute to problematic debt. Labor MP Stella Creasy last month called the market a “financial scandal to come”.

Woolard said people “shouldn’t demonize” BNPL but said the market was “riddled with problems”. The lack of communication within the industry means consumers can easily take on debt up to £ 1,000 by taking out plans with different providers, he said.

READ MORE: COVID-19 Will Definitely Change The Way We Shop, Says Klarna CEO

“They all effectively fly blind to some extent,” Woolard told reporters.

One in ten users of BNPL services is also already in arrears with their bank, which means they should not be receiving credit. Many borrowers do not understand that BNPL is a form of credit.

Woolard said the calls for regulation were largely “preemptive” after learning from the scandals that followed the growth of the payday lending industry.

“It’s absolutely the right thing to step in now and get this under control,” he said. “You can only see this popularity grow. “

The Woolard review recommended subjecting BNPL providers to existing regulations for credit providers. That would mean businesses could face penalties and fines for breaking the rules, proper accessibility checks would be needed, and consumers could seek official redress if things go wrong.

“Basically it would put them on a level playing field,” Woolard said.

FCA President Charles Randell welcomed the findings of the review and said there was “a strong and urgent case” to regulate the BNPL industry. The FCA Board of Directors has written to the Treasury asking it to revise the legislation to incorporate BNPL into the FCA mandate. The Treasury backed the recommendations on Tuesday morning.

“Buying now-paying later can be a useful way to manage your finances, but it’s important that consumers are protected as these deals become more popular,” said MP John Glen, Economic Secretary to the Treasury, in a statement. communicated.

“By stepping in and regulating, we’re making sure people are treated fairly and that only the deals they can afford are offered – the same protections you expect with other loans. “

READ MORE: Britons face Christmas bills of up to £ 2.3bn

Anthony Morrow, co-founder of online financial advisory service OpenMoney, said he was “delighted” with the decision to regulate the industry.

“We have long argued that Buy Now Pay Later (BNPL) programs like Klarna and ClearPay make it very easy to take on debt without thinking about how to pay it off or the implications if you don’t,” he said. -he declares.

“Our research found that 77% of users struggled to refund purchases made with BNPL. Without proper regulation, these programs expose consumers to serious financial risk, especially in the current economic uncertainty. “

In addition to calling for BNPL regulation, the Woolard Review urged the FCA to improve funding for debt counseling, expand its pandemic forbearance policies for the recovery phase, and encourage more debt counseling. alternatives to high cost credit.

UK households have over £ 250 billion in unsecured debt outstanding. Over 40 million people used consumer credit services in 2019.

“Unaffordable credit can hurt the lives of people who already struggle to manage their daily expenses,” Randell said in a statement. “While we made progress in reducing unaffordable debt in the years leading up to the coronavirus, the pandemic had an uneven impact on households.

“A lot of people have been able to reduce their debts, but some of the poorest in our society have used up all their savings or have taken on more debt. “

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