Tighter regulation of the buy now, pay later credit industry is on the way, though the government has concluded there is “relatively limited evidence” of widespread consumer harm.
The comment, in a new document from the Treasury, could indicate that legislation will be less tough than some have called for, and may explain why leading buy now, pay later (BNPL) players, such as Klarna, Laybuy and Clearpay, were quick to welcome the long-awaited consultation on how the multibillion-pound industry should be policed.
The new form of credit is especially popular among shoppers under 30 and those with tight finances, who have welcomed the ability to delay payment, and it has taken off during the pandemic.
It allows customers to stagger payments for products such as clothes, footwear, beauty items and furniture with no interest or charges unless they fail to pay back on time, at which point some firms impose late fees. While for some it is the future of millennial finance, for others it could be the next Wonga-style scandal.
In the UK, the use of BNPL nearly quadrupled in 2020, to £2.7bn of transactions, official data shows, despite concern that it encourages shoppers to buy more than they can afford and to rack up sizeable debts. Because much of the market is unregulated, some people are able to take out credit they otherwise would not be able to obtain.
Citizens Advice said BNPL borrowing “can be like quicksand – easy to slip into and very difficult to get out of”.
In February, the government announced that BNPL would be regulated by the Financial Conduct Authority (FCA), ruling there was “a significant risk” of harm to consumers. This came after a review led by Christopher Woolard, a partner at EY. The Treasury has now launched its consultation setting out options for how regulation should happen.
In response to campaigner and politicians’ concerns, the document states that “while the government agrees with the Woolard review about these potential sources of consumer detriment, there is relatively limited evidence of widespread consumer detriment materialising at this stage”.
BNPL should be subject to regulation that is “proportionate” but “not so burdensome that it inhibits the product being offered, or reduces consumer choice”, it says.
Treasury proposals include introducing rules governing how BNPL firms treat customers in financial difficulty. Also, proportionate regulation should include the ability for consumers unhappy about the way a BNPL firm has treated them to complain to the Financial Ombudsman Service.
It could be late 2022 or 2023 before regulation takes effect. The Treasury consultation, which runs until 6 January, will be followed by an FCA consultation.