Tag: Clearpay

Shoppers to be protected by new Buy-Now, Pay-Later rules

  • Providers will have to ensure lending is affordable – stopping users from accumulating unmanageable debt  
  • Rules deliver better protection for shoppers and clarity for innovative sector after years of uncertainty

Millions of shoppers are set to be protected by new rules for Buy-Now, Pay-Later products.  

Buy-Now, Pay-Later products have become increasingly popular in recent years as they allow people to spread the cost of purchases over time, but users currently do not have access to a range of key protections provided by other consumer credit products.  

The Government has today launched a consultation on proposals to fix this by bringing Buy-Now, Pay-Later companies under the supervision of the Financial Conduct Authority (FCA) and applying the Consumer Credit Act, ensuring users receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise.  

Economic Secretary to the Treasury Tulip Siddiq said: “Millions of people use Buy-Now, Pay-Later to manage their finances, but the previous government’s dither and delay left them unprotected.

“We promised to take action before the election and now we are delivering. Our approach will give shoppers access to the key protections provided by other forms of credit while providing the sector with the certainty it needs to innovate and grow.”

The new rules will allow the FCA to apply rules on affordability – meaning that Buy-Now, Pay-Later companies will have to check that shoppers are able to afford repayments before offering a loan, which will help to prevent people building up unmanageable debt.

Companies will also need to provide clear, simple and accessible information about loan agreements in advance so that shoppers can make fully informed decisions and understand the risks associated with late repayments.

Consumer Credit Act information disclosure rules will be disapplied so that the FCA can consult on bespoke rules that ensure users are given this information in a way that is tailored to the online setting in which Buy-Now, Pay-Later products are generally used.    

Buy-Now, Pay-Later users will be given stronger rights if issues arise with products they purchase, making it quicker and easier to get redress. This includes applying Section 75 of the Consumer Credit Act, which allows consumers to claim refunds from their lender, and access to the Financial Ombudsman Service to make complaints. 

Rocio Concha, Which? Director of Policy and Advocacy, said: “Which? has been a leading voice calling for the regulation of Buy Now Pay Later for years so it’s positive that new rules are coming in that should provide much-needed protections for users of these products.

“Our research found that many BNPL customers do not realise they are taking on debt or consider the prospect of missing payments, which can result in uncapped fees, so clearer information about the risks involved as well as the use of affordability checks and options for redress would be a win for consumers.

“We are keen to see legislation quickly passed to ensure that BNPL users are protected as strongly as consumers using other credit products.”

Sebastian Siemiatkowski, Co founder and CEO of Klarna, said: “Congratulations to Tulip Siddiq and the government on moving quickly!

“They have been working with the industry and consumer groups long before coming into office. We’re looking forward to carrying on that work to put proportionate rules in place that protect consumers while fostering growth.”

Michael Saadat, International Head of Public Policy at Clearpay said: “We welcome today’s update from City and FinTech Minister, Tulip Siddiq, on BNPL regulation.

“It is encouraging that HM Treasury has listened to industry feedback and evolved the previous framework to ensure a more proportionate approach to regulation.

“We have always called for fit-for-purpose regulation that prioritises customer protection, delivers much-needed innovation in consumer credit and that sets high industry standards across the board.

“We will continue to support the Government and the FCA to deliver fit-for-purpose regulation that ensures consumers are protected in a way that supports the UK’s thriving FinTech sector.”

Chris Woolard, Author of the 2021 Woolard Review, which looked at change and innovation in the unsecured credit market, said: “Today marks a significant milestone for consumer-focused financial regulation.

“The proposed package of regulation would implement the recommendations of the Review and mean millions of people up and down the UK will benefit from stronger financial protection as they borrow using BNPL, especially the most vulnerable in society. The incoming regulation will also provide long-term certainty and standards for the market.”

The consultation will be conducted quickly – closing on 29 November – to reflect the urgent need for action to protect consumers.  

Final legislation is expected to be laid in Parliament in early 2025. Once the legislation is laid, the FCA will finalise the rules so they can take effect in 2026 – bringing clarity to the sector after years of uncertainty about how it will be regulated.  

This follows the Prime Minister saying he would remove regulation that needlessly holds back investment and growth. Today’s announcement brings in much needed regulation that stops people spiralling into debt.

Justin Basini, Co-Founder and CEO of The ClearScore Group said: “We welcome this consultation to bring Buy-Now, Pay-Later borrowers under the same protections and creditworthiness assessments as other mainstream financial products such as credit cards and loans.  

“It is a sensible step in ensuring that this new, important form of credit continues to provide much-needed flexibility for consumers while also managing any risks.”

Buy now, Regret later?

Which? is calling for Buy Now, Pay Later firms like Klarna and Clearpay to be fully regulated to provide greater protection for consumers, as new research from the consumer champion finds concerning industry practices encourage people to spend more than they planned to.

The consumer champion’s findings show that these slickly designed, easy-to-access credit products are encouraging impulse buying, with nearly a quarter of BNPL users (24%) saying they spent more than they planned to because BNPL was available.

With one in ten (11%) BNPL users reporting that they have incurred late charges when paying this way, Which? is concerned about the dangers involved with this growing form of unsecured credit, particularly when the risks are not always made clear, and is calling for the financial regulator to be given new powers to fully regulate the BNPL industry to prevent consumers from being harmed.

The research suggests pushy marketing strategies, combined with sales features that make payment easier – such as ‘express checkout’ services on some retailers’ websites – could be driving people to overspend and leading to people falling into debt, a concern also shared by debt charities such as StepChange.

Which? also found that a quarter of BNPL users (26%) said they had not planned to use this type of payment option until it popped up at checkout, while two in ten (18%) said they used BNPL because they were offered a discount to do so.

One in ten (13%) also said they used it by accident because it was selected as the default payment option at checkout. One survey respondent said: “I was tricked into [using] it because the box was already ticked”.

BNPL firms also advertise heavily on their partners’ websites. Which? looked at 80 of these sites and found the largest BNPL ads take up as much as 80 per cent of the screen, with fashion retailers most likely to carry these prominent ads.

These factors are evidence of the firms’ application of consumer psychology to drive sales, a strategy one BNPL provider has promoted to its retail partners.

In 2017, Klarna, one of the leading BNPL firms in the UK, commissioned a study with the University of Reading into online shopping behaviour. The report, intended for partner retailers, explains how to design ‘customer journeys’ that will persuade people to make ‘emotional’ purchases instead of ‘logical’ ones.

However, as Which? research shows, these frictionless customer journeys can lead to shoppers spending more than they can afford, without necessarily being aware of the risks.

41 per cent of people in the Which? survey who were aware of BNPL either did not believe or did not know that missing a payment could lead to the BNPL firm passing your debt on to a debt collection agency.

As a result of its findings, Which? is now calling for providers of this type of BNPL service to be regulated by the Financial Conduct Authority.

In its submission to the regulator, the consumer champion said that, while supportive of innovation, it believes that the BNPL market must have consumer protections in place in line with other regulated unsecured credit products.

Giving the FCA the powers to regulate the BNPL market would allow it to more effectively monitor how BNPL firms treat consumers, and if necessary, take action to prevent consumers from being harmed.

Jenny Ross, Which? Money Editor, said: “While Buy Now, Pay Later services offer speed and convenience at the checkout, our research shows their design makes it far too simple for shoppers to spend more than they were intending.

“This could lead to people building up debts that they may struggle to pay back, which is particularly concerning if they don’t understand the risks of using this type of product.

“Given that many people’s finances are stretched now more than ever, we believe that the FCA needs to regulate this market to ensure consumers are not harmed and that action can be taken if these firms are treating customers unfairly.”

A spokesperson for Klarna responded: “While we cannot speak for the sector as a whole, it is wholly incorrect to claim that Klarna uses ‘pushy marketing strategies’. All Klarna customers are provided with our terms and conditions, which clearly outline the potential consequences of non-payment.

“If a customer misses a payment, we will proactively contact them to remind them via text, email, in-app notifications and letters. Klarna will only refer unpaid debts to a debt collection agency as a last resort after a period of several months.

“Klarna is fully engaged with the FCA review of the unsecured credit market.”