The largest “buy now, pay later” consumer credit providers face regulation in the UK after the government opened a long-awaited consultation into the fast-growing market reflecting concerns about the risks to consumers.
The review, which is due to close next January, comes almost 10 months after a report commissioned by the Financial Conduct Authority called for “very urgent” intervention.
While consumer credit regulations cover some BNPL providers, market leaders including Klarna, Clearpay and PayPal have to date fallen outside this due to an exemption designed for short-term invoice deferral which has been in force since 1989.
The consultation will look at a range of issues, including assessing evidence of “consumer detriment”, the way providers assess creditworthiness of clients and how any increased regulation might affect smaller merchants.
BNPL providers, which offer short-term, interest-free credit provided full repayment is made on time, have proved highly popular during the pandemic.
Transactions jumped fourfold to £2.7bn last year, accounting for 1 per cent of the total credit market, according to the Financial Conduct Authority. Consumer group Which? estimated that one in three people in the UK have used a BNPL product.
The FCA’s report into the sector published in February raised a number of concerns about the risk of BNPL to consumers. One of the biggest concerns was the lack of credit checks that allowed individuals to rack up large debts with different lenders, while it also said many did not understand they were entering a credit agreement.
“We strongly believe that these services make it too easy to take on debt without fully thinking about how to pay it back and what might happen if you don’t,” said Anthony Morrow, co-founder of financial advisory OpenMoney.
Sebastian Siemiatkowski, co-founder and chief executive of BNPL fintech Klarna, welcomed the prospect of regulation, adding that it would “drive consistency and improve outcomes for all consumers”.
Earlier this week, Klarna pre-empted the consultation when it announced sweeping changes to its UK offering. These include offering customers the option to pay the full amount at the time of purchase and the promise of “stronger credit checks”.
Last December, the UK’s Advertising Standards Authority banned several Klarna advertisements that “irresponsibly encouraged the use of credit to improve people’s mood”, and introduced guidelines requiring all providers to make clear that BNPL is a type of debt.
BNPL fintechs Australian Zip and New Zealand-based Laybuy, which both have UK businesses, also welcomed the consultation, saying it would improve consumer confidence.
The FCA said in August that it planned to consult on regulating BNPL providers next year once the government review was completed.