UK debt charities welcome crackdown on ‘buy now, pay later’ lenders

Debt charities welcomed government plans to give the UK’s main financial watchdog sweeping powers to rein in the “buy now, pay later” sector but urged ministers to accelerate the legislation adoption to protect customers from the short-term credit products.

Under draft proposals published on Tuesday, the Financial Conduct Authority will be able to penalise companies that fail to conduct adequate credit checks, ranging from fines to a ban on further lending. The government, which will consult on the plans, said it aimed to put legislation before parliament later this year.

“Buy now, pay later borrowing can be like quicksand — easy to slip into and very difficult to get out of,” said Matthew Upton, director of policy at Citizens Advice. “Every day without regulation is another day people are left unprotected.”

The loans currently fall outside the FCA’s regulatory umbrella because of an exemption in consumer credit laws for interest-free deferred payments, a clause designed to allow non-financial companies, such as dentists, to offer repayment plans.

The products allow consumers to repay the cost of a purchase in regular instalments, which are interest-free so long as they are paid on time. Some lenders charge late payment fees should a customer fall into arrears, while others solely receive merchant fees for brokering the transaction.

Providers argue their services are less predatory than credit cards, which charge an average annual interest rate of close to 20 per cent, according to the Bank of England.

But the rapid expansion of the sector, driven by the big rise in online shopping during the pandemic, has prompted concerns that consumers are taking on unaffordable levels of debt.

“At present some consumers may hold multiple buy now, pay later agreements that are unaffordable to them, which puts them at risk of escalating fees if they miss repayments,” said Richard Lane, director of external affairs at debt charity StepChange.

“This is especially concerning as our research suggests a significant crossover between use of buy now, pay later and financial difficulty, with many people borrowing to pay bills or make credit repayments,” he added.

The FCA said it welcomed “the launch of the consultation on bringing exempt buy-now, pay-later products into regulation”.

The watchdog added: “As [buy now, pay later] products develop and become more widespread, they can have benefits for consumers, but there are also risks and the potential for harm.”

The proposed legislation would also rewrite parts of the Consumer Credit Act that exempt the regulation of loans of under £50 as many buy now, pay later purchases fall below this threshold.

Klarna, one of the biggest buy now, pay later lenders, welcomed the proposed reforms. Alex Marsh, the head of the Sweden-based group’s UK business, said the company had “long called for the measures announced today”, adding: “We are ready for regulation, and look forward to continuing to work with the government to help make this happen.”

Gary Rohloff, managing director and co-founder of Australia-listed lender LayBuy, said he was supportive but called on the government to ensure the new regulation was “proportionate”.

He added: “We need a regime that protects consumers but one that strikes a balance and supports innovation, competition and reflects the lower risk and average purchase size compared to other forms of credit like store cards or credit cards.”