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02 Feb 2021 | 09:10

City watchdog calls for regulation of buy now, pay later lenders

(Sharecast News) - Buy now pay later lenders are to come under increased regulatory scrutiny following a review of the sector, it was confirmed on Tuesday. Buy now pay later (BNPL) lenders such as Klarna and Laybuy allow shoppers to defer or split payments. The service is offered through major retailers and payments are interest free. However, late fees are charged if instalments are missed.

The FCA said it would be easy to build up unseen debts of £1,000 through BNPL lenders, and that one in ten people using them already had arrears elsewhere. The FCA also estimated that around 5m people had used BNPL schemes since the start of the Covid-19 pandemic.

The review, led by former FCA interim chief Christopher Woolard, has set out 26 recommendations. These include bringing regulatory-exempt products into the regulatory perimeter "as a matter of urgency" and providing free debt advice, alongside more long-term suggestions, such as encouraging alternatives to high-cost credit.

Woolard 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 customers at greater risk of financial difficulty.

"Changes are urgently needed: to bring BNPL into regulation to protect consumers, to ensure there is secure provision to debt advice, and to maintain a sustained regulatory response to the pandemic."

The FCA said it supported the recommendations, and had written to John Glen, the Treasury's economic secretary, to discuss drawing up appropriate regulation.

Charles Randell, chair of the FCA, said: "Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses. While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households.

"The FCA agrees there is a strong and pressing case to bring BNPA business into regulation."

In a statement, Glen said: "By stepping in and regulating, we're making sure people are treated fairly and only offered agreements they can afford, the same protections you'd expect with other loans."

Sweden's 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."

Laybuy told the BBC: "We believe we are already in a good place when it comes to regulation. There needs to be a balance to protect consumers but also make sure it retains the innovation and simplicity that consumers value."

Laith Khalaf, financial analyst at AJ Bell, said: "BNPL schemes are a small but growing area of the consumer market and it makes sense to regulate these services. Indeed, bringing these products into the regulatory perimeter is simply closing a loophole that was designed to allow deferred payment of short-term invoices.

"Also of concern is the close relationship BNPL firms have with retailers, often receiving payments from vendors on the basis that their service will increase sales. That leads to the potential for misaligned incentives, where the financial interest of BNPL providers lies in boosting sales with little regard for the consequences for consumers.

"Regulating BNPL will mitigate this risk, and firms that are behaving responsibly should have nothing to fear from oversight."
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