For years, the UK’s consumer finance sector has accommodated several “Buy Now Pay Later” (BNPL) schemes, allowing consumers to effectively purchase goods and pay in instalments, or without needing to pay until a later date. But, since the COVID-19 pandemic hit the UK, causing salary sacrifices and surges in unemployment, the level of consumer debt racked up by using BNPL schemes has increased at an alarming rate. It would appear that people with more time on their hands, spent this shopping! Certain consumers have made repeated purchases that have led to debt issues arising. As such the FCA, which is deeply concerned, is looking to regulate this corner of the consumer finance industry.
Examples of BNPL schemes
Global high street giant Klarna swept onto the scene in 2015, and with its quirky branding and no-nonsense, easy-to-navigate process, soon caught the attention of consumers. Consumers who purchase from certain retailers can buy and pay in 30 days, or split their payments into three smaller amounts using Klarna. To date, Klarna has over 15 million customers.
Other BNPL schemes such as Clearpay, Openpay and Laybuy offer similar repayment processes, enabling consumers to handle their balance in a different way. But this is clearly a slippery slope, and having an “I’ll pay for it after next payday” mentality seems to be landing many consumers in high amounts of BNPL debt.
What does it mean for the finance sector?
The problem is, not every consumer pays their BNPL debt on time. Klarna has a “Snooze” functionality, enabling a further 10 days before payment must be made. Even then, a high number of consumers are being chased for late payments. The FCA is concerned that these debts are currently hidden from mainstream credit checkers, and could be creating a real threat to consumers as affordability is not investigated to any great extent.
The regulatory landscape
To provide credit facilities in the UK by way of business an entity needs to be authorised by the FCA, in line with the provisions of the Financial Services and Markets act 2000 and the Regulated Activities Order 2001 (RAO). Currently, certain agreements are exempt under the RAO, which allow businesses and smaller entities to avoid the huge cost or regulation. Being authorised or permitted is costly both financially and in terms of management time and resource. More alarmingly, it can attract personal liability to the directors and managers under the Senior Managers Regime.
Plan not ban?
These providers must urgently show the government that they can self-regulate. All that is required is technology to check affordability and credit worthiness. If not and the FCA regulate, this could seriously hamper the ability of responsible consumers to have access to easy funding, and will also create huge hurdles for both business and credit funders.
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