Buy Now Pay Later needs 'urgent' regulation, report finds

A report on the unsecured consumer credit market has found “changes are urgently needed” to protect the public.

The Financial Conduct Authority (FCA) has called for regulation of Buy-Now-Pay-Later (BNPL) credit agreements after the risk that they could harm consumers increased.

BNPL transactions tripled in 2020 as the coronavirus pandemic drove people to online shopping.

BNPL allows people to spread the cost of a purchase interest-free, but a report published today, Tuesday, February 2, found it also put them at risk of harm.

The Woolard Review found more than one in ten customers of a major bank using BNPL were already in arrears.

Christopher Woolard, chair of the review, said: “Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone. New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty.

“Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic.”

Major operators include Klarna, Clearpay and LayBuy, which have proven popular with younger shoppers who are moving away from credit cards.

BNPL has seen a particular uptake in the fashion sector which has been identified as a possible reason that women are also more likely to use the product.

The UK Government announced it was acting “swiftly” to bring interest-free BNPL agreements under regulation by the FCA.

Legislation, the announcement said, will be brought forward “as soon as parliamentary time allows”.

Although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers and the review found it would be relatively easy to accrue around £1000 of debt that credit reference agencies and mainstream lenders cannot see.

The Woolard Review made a series of additional recommendations across the unsecured credit market. The government said it welcomed the proposals, which it will examine and respond to.

A spokesperson for Klarna said: “As a fully licensed bank, Klarna is very comfortable operating in a regulated environment and wholeheartedly supports the regulation of the BNPL sector in the UK.

“We agree that regulation has not kept pace with new products and changes in consumer behaviour and it is now essential that regulation is modern, proportionate and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences.

“This is why we welcomed Woolard Review into change and innovation in the unsecured credit market, we have fully engaged in this process and we now look forward to working together with the FCA, government and the wider sector to build a modern regulatory and supervisory framework that delivers the best outcomes for customers.”