Plans to regulate Britain’s booming £2.7billion buy now, pay later industry will be released within weeks, This is Money understands.
A consultation on draft regulation affecting platforms like ClearPay, Klarna, Laybuy and PayPal is expected to be published in early May, after an amendment to credit legislation was passed in parliament this week.
A Financial Conduct Authority review of the sector released in early February found it needed to be regulated ‘as a matter of urgency’ as it was found to pose ‘a significant potential consumer harm’.
Checkout credit providers like Clearpay, Klarna, Laybuy and PayPal were said to pose ‘a significant potential consumer harm’ according to a regulatory review of the sector
The regulation will likely cover the marketing and ease of use of these platforms, which enable consumers to spread the cost of their online shopping using credit.
It could require platforms to carry out hard credit checks which appear on borrowers’ reports, after the FCA review – led by its former chief executive Christopher Woolard – reported that it would be ‘relatively easy’ to rack up as much as £1,000 in debt from different providers.
Some platforms currently only carry out ‘soft’ searches which are not publicly visible to lenders, while some, according to the review, do not carry out any at all.
Regulating buy now, pay later providers will allow borrowers to complain to the Financial Ombudsman Service, while This is Money also understands credit card-style protections could be applied to checkout credit providers.
Under Section 75 of the 1974 Consumer Credit Act, credit card providers share the liability if a purchase of between £100 and £30,000 is not as described, or if a consumer suffers breach of contract or misrepresentation.
This could also apply to purchases made using buy now, pay later providers, particularly given consumers are increasingly using such payment methods to purchase higher-value items like white goods and electrical products.
Although Treasury minister John Glen said two months ago that the Government would regulate the sector to ‘mitigate the risks of consumers getting into unaffordable debt’, there had been little substantive action before this week.
Treasury minister John Glen said in February the £2.7bn industry would come in for regulation
The Treasury was ‘under a lot of pressure’ to introduce regulation, according to a source, although it remained very positive on the industry.
Government minister Earl Howe said an amendment to the Financial Services Bill passed in Parliament on Wednesday marked the first step towards bringing the sector under ‘proportionate regulation.’
The amendment would allow the Government to change which companies are exempt from the Consumer Credit Act; legislation which largely does not cover buy now, pay later providers in its current form.
The Government has said a consultation would be published ‘later in the spring’, and This is Money understands draft regulation covering the sector is expected in May, meaning guidelines could be as little as a fortnight away.
Any regulations would be implemented using secondary legislation, which would let MPs vote on but not amend them if they felt they were insufficiently tough on checkout credit providers.
But while this would make the passage of any rules ‘significantly quicker’, sources said it was ‘still likely to be late this year at the earliest before regulation takes effect, given the time required for consultation process.’
The Labour MP Stella Creasy told This is Money in February that she hoped retailers would take such payment methods off their websites until any regulation came into effect, having warned the rapidly growing sector could become the next Wonga-style scandal.
Some providers of buy now, pay later services do not carry out any kind of credit checks, not even performing soft searches which do not show up on borrowers’ credit files
She said: ‘As we wait for the Government to act on recommendations, retailers who are currently promoting buy now, pay later products which we now know are exploitative could take the first step and remove them from their websites until regulations are in place.’
The Woolard review of the £2.7billion industry found it represented just 1 per cent of Britain’s credit market ‘but has accelerated very quickly to get there and is still growing’.
The value of payments made through such services nearly quadrupled last year, with increasing numbers of retailers signing up to offer them because they make consumers spend more and more often.
This is Money reported last month how John Lewis and Marks & Spencer appeared to be developing their own in-house pay later methods, with John Lewis also poaching former Experian director Amir Goshtai to run its financial services business.
New Look has branded its store credit to make it more like a buy now, pay later service, while John Lewis and M&S are introducing their own in-house versions as retailers cash in on credit
Meanwhile the high street retailer New Look has branded its in-store credit card, provided by Swedish bank Ikano, as a ‘buy now, pay later’ service.
Some of those who have called for a clampdown on the sector told This is Money they were disappointed to see the likes of John Lewis and M&S jumping on the ‘buy now, pay later bandwagon’, which they described as ‘a ticking time bomb’.
While many of these new providers often do not charge interest or fees on purchases, concerns have been raised about how stringent their affordability checks are and the invisibility of such credit on borrowers’ credit reports, which has been criticised by high street banks.
In response to the idea that such financing would be subjected to formal affordability and credit checks, as the Treasury had suggested, credit agency Experian told This is Money: ‘We welcome steps to encourage more credit data sharing by the buy now, pay later industry because it benefits both lenders and consumers.
‘In doing so, all lenders will have an improved view of what their customers can afford to repay so they can make the most appropriate lending decisions. We will continue to work closely with the sector.’
However, regulation could prove burdensome for small businesses which benefit from these providers, if they need to apply for a credit broking licence in order to provide such financing.
Swedish import Klarna, one of Britain’s largest pay later platforms and a fintech valued at as much as £22.5billion, previously told This is Money: ‘At Klarna we have long been calling for regulation to raise standards across the sector and we welcomed the Woolard Review into change and innovation in the unsecured credit market.
Labour MP Stella Creasy has called for a crackdown on pay later services
‘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.’
Gary Rohloff, the managing director of Laybuy, said: ‘We feel we’re in a good place and welcome proportionate regulation. We have never used influencers to market our product and we conduct hard credit checks to make sure customers can afford to pay us back.
‘People increasingly see the benefits of using buy now, pay later, but it’s important it’s done responsibly.’
Stella Creasy added: ‘The test of whether the government is getting a grip of the damage the BNPL industry is doing is whether consumers are protected from getting into loans they can’t afford or able to complain if they are mis-sold credit.
‘It’s a step forward to say the BNPL industry needs to be regulated, but worrying that the detail is still not clear or the timescale from when it will be implemented.’
The Treasury said it had nothing to add beyond its announcement in February that the sector would be brought under regulation.
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