Buy now, pay later market to face tougher regulations

Added: 2nd February 2021

Buy now, pay later (BNPL) firms such as Klarna will face more scrutiny by financial regulators under new rules.

The move is intended to help consumers, especially younger ones, who use these services, avoid getting into debt. According to the Financial Conduct Authority (FCA), it is easy for users to build-up unseen debts of £1,000. Now it will regulate the sector, after use of these services quadrupled last year. 

Since the pandemic, BNPL services were used by five million people in the UK for total sales of £2.7bn.

The FCA concluded the market should be brought under regulation "as a matter of urgency" as there was "significant potential for consumer harm". It means that providers will need to undertake affordability checks before lending and ensure that customers are treated fairly, especially those who are vulnerable and struggling with repayments. The Treasury said interest-free BNPL agreements will now be regulated by the FCA.

The changes - which the Government will aim to implement through legislation - will also mean people can contact the Financial Ombudsman if they have a complaint.

Commenting on how the move could affect Retra members, Matt Sheldrake, managing director of Retracare, said: “If they are using the Retra/Hitachi finance facility they will not be affected by the new rules and regulatory changes to BNPL, as we already operate in a regulated environment.”

He added: “Companies such as Klarna, who offer BNPL, will lose their USP and dealers using this form of unregulated credit will be affected: acceptance rates will reduce, and we will see introduction of a more rigorous screening and application process. These changes will level the playing field for all lenders and will ultimately protect the consumer. If anything, now is a great time to switch to Retra/Hitachi finance, and with the launch of the CreditMaster3 system [from Hitachi] all the potential headaches are removed.”

Reacting to the announcement, Alex Neill, chief executive of online consumer complaints service Resolver, said: “This is fantastic news for the millions of people who use these services, without realising the dangers that can arise if you get into difficulty paying. The explosion in complaints Resolver has seen highlights how quickly we all have to adapt to the way new forms of credit work if the nation is going to avoid sleepwalking into debt.”

He added: “I’d like to see more retailers being held to account for the information they provide about credit and the ease with which they allow you to borrow without warnings of the consequences. Though the financial services industry is tightly regulated, there is little protection outside of the courts for problems with retailers.”