The UK government has launched a consultation on ‘buy now, pay later’ services for the first time ever, in a bid to regulate the sector.
Millions of shoppers have been offered loans from companies such as Klarna, Clearpay, and Laybuy, to provide them with an alternative means of paying for their shopping, which has steeply risen during the coronavirus pandemic.
These include splitting payments at checkouts and paying for their goods, which in most cases are fashion items, in 30 days, interest-free.
Concerns have been mounting that consumers will be encouraged to spend beyond their means as shopping debts continue to rise across the UK.
On Thursday, the Treasury department set out “policy options to achieve a proportionate approach to regulation of BNPL”.
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As BNPL is not currently regulated by the UK’s financial watchdog, there is no obligation for providers to conduct creditworthiness assessments as part of taking on new customers or when entering into individual agreements.
“There is always a balance to be struck to ensure that consumers are given appropriate protections without unduly limiting the availability and cost of useful financial products,” the consultation said.
The Treasury will decide how the sector's credit checks, fees and marketing are regulated and will be seeking views on where it should draw the boundary for regulation of BNPL products.
The consultation said the government is open to receiving feedback on its suggestions until 6 January.
The changes proposed also include highlighting disclosures on the consequences of using BNPL services, such as arrears fees or debt being transferred to a debt collection agency.
Matthew Upton, director of policy at Citizens Advice, said: “Buy now pay later borrowing can be like quicksand – easy to slip into and very difficult to get out of.
“Split payments are offered as a temptation at the checkout, but the consequences can be devastating for those who are least able to deal with them.”
Meanwhile, Anthony Drury, managing director of Zip, which provides BNPL services to eight million customers, said: “As with any new, innovative financial product, it’s important that customers are protected by regulation, ensuring that there is clarity and consistency across the industry. This will give consumers confidence, provide retailers the opportunity to grow, and allow businesses like ours to invest and innovate in the UK.
“If implemented effectively, it’s likely we’ll see more people using Buy Now Pay Later as a convenient part of their personal finance toolkit.”
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In February, the Financial Conduct Authority (FCA) urged the government to step in and assess the BNPL industry. The Woolard Review, published that month, highlighted areas of concern, including poor consumer understanding of products, a lack of affordability assessments and inconsistent treatment of people in financial difficulty.
It also found that checks undertaken by providers focus on the risk for the company involved rather than how affordable it is for consumers.
As many as five million people used the services last year, spending £2.7bn ($3.7bn). Around a quarter of buy now, pay later users were aged between 18 and 24, while nine in every 10 transactions involve fashion and footwear. Typically 75% of users were women.
According to data from the Citizens Advice Bureau, more than half of young people who have used buy now pay later in the last year struggled to make a repayment.
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