‘Buy now, pay later’ firms like Klarna and Laybuy will now face tougher regulations by UK authorities after their usage nearly quadrupled last year.
The Financial Conduct Authority (FCA) will now be given powers to regulate the £2.7 billion BNPL sector following an in-depth four-month investigation, which found one in 10 users were already in debt elsewhere.
BNPL services, which are now offered by hundreds of major retailers, offer customers the option to pay for goods in a number of interest free instalments.
The sector has made headlines in recent months amid fears it is putting its largely millennial user base at risk of falling into debt, allowing them to buy more than they can realistically afford.
Under the FCA’s new regulations, firms will be required to conduct thorough affordability checks before approving a customer.
According to the FCA’s review, shoppers can wrack up hundreds of pounds in debts that other lenders would not be able to see.
“The review found it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see,” economic secretary to the treasury John Glen said.
“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.”
In response to the new regulatory plans, which will see the FCA begin formal oversight later this year, the payment providers have been largely supportive.
In a tweet, Swedish payment giant Klarna praised the action stating: “Current regulation is nearly 50 years old, it has not kept pace with newer products and changing consumers’ needs. It’s time for modernisation so it is fit for purpose.”
Klarna supports the regulation of Buy Now Pay Later in the UK. Current regulation is nearly 50 years old, it has not kept pace with newer products and changing consumers needs. It's time for modernisation so it is fit for purpose. Read our statement here https://t.co/SDK2m29qBz
— Klarna (@Klarna) February 2, 2021
Its rival Laybuy’s founder Gary Rohloff also commented: “Firstly, I think it’s important to stress that if offered responsibly, credit offers many positive opportunities for consumers.
“Ever since we started Laybuy, we have set high standards of information and transparency for customers. Today’s report makes clear it is time for the industry to step up.
“BNPL is an effective and lower risk tool to help people manage their budget. It’s important that these products remain available for consumers, the vast majority of whom value BNPL services.”