Klarna crackdown begins as buy now pay later industry is regulated

Klarna, the buy now, pay later company, first offered British shoppers the opportunity to postpone paying at the checkout in 2014, when it launched in the UK.

Yet seven years later, regulation is only now on cards after five million people spent billions of pounds using quick and easy loans last year.

Consumer advocates have spent months calling for a crackdown amid fears that shoppers would be encouraged to spend more than they could afford.

The Financial Conduct Authority is finally cracking down on buy-now-pay-later companies like Klarna, which have proven very popular with young shoppers on the go.

And finally, the Financial Conduct Authority (FCA) yesterday announced plans to regulate the industry, but warned that it could take months.

It comes as buy now, pay later purchases nearly quadrupled last year to £ 2.7bn as online shopping spiked into lockdown.

Cash loans are now advertised online by retailers and there is concern that their presence in fashion stores will have a detrimental impact on young women in particular.

The FCA review released yesterday found that one in ten clients of a major bank was already in debt when they were allowed to buy something using buy now, pay later.

It also found that 25% of the borrowers were between 18 and 24 years old and 50% between 25 and 36 years old. The figures showed that three-quarters of the customers were women and nine out of ten transactions involved fashion or footwear.

The loans are interest-free, but some lenders charge late fees, and customers who fall behind may face lawsuits from debt collectors.

The FCA also found that there were spikes in buy now, pay later usage correlated with the April and November Covid-19 closures.

Buyers told the city’s watchdog that they assumed the services were regulated. One said: ‘Take it for granted that they [financial service providers] are regulated.

The report also reveals that some lenders told retailers that their services could boost sales by 30 percent.

While the average amount borrowed for purchases can be as little as £ 65, the report revealed that it would be “relatively easy” to run up debt through multiple lenders.

And with lenders looking to expand to higher-value retailers, the government says the risk of consumers taking on unsustainable debt is increasing.

The FCA review released yesterday found that one in 10 clients of a major bank was already in debt when they were allowed to buy something using BNPL.

The FCA review released yesterday found that one in ten clients of a major bank was already in debt when they were allowed to buy something using buy now, pay later.

Christopher Woolard of the FCA says: “If you look at the scale of growth, there is a really urgent need to ensure that this market has strong boundaries around it and that consumers are protected.”

He says that the lack of information companies had about their customers meant they were “flying blind.” He adds: “It is quite easy for a consumer to accumulate around £ 1,000 without much effort.”

One shopper told FCA investigators that the express checkout service reminded him of the “Buy Now on Amazon” button. The Treasury has confirmed that it will have to carry out a consultation before the lenders can be regulated and will present the legislation “as soon as the parliamentary calendar allows.”

Once the new laws are passed, lenders will need to conduct credit checks before making loans.

Why do we have to act now

Secretary of the Treasury John Glenn

Secretary of the Treasury John Glenn


The pandemic has been particularly difficult for young people.

At a time when they should be building their future, they are more likely to be laid off and face a tough job market.

They are also at a higher risk of having financial problems. A recent survey found that people under the age of 30 are at least five times more likely to have troubled debt than people over the age of 50.

Therefore, the rapid rise of new innovative buy-now-pay-later products deserves scrutiny.

Buy now, pay later has become a common choice for consumers during the pandemic as online shopping has shifted.

It is particularly popular with young people, many of whom are drawn to having no interest, rather than traditional forms of credit, such as credit cards.

However, when a buyer can make multiple buy-now-pay-later deals with different vendors, refunds can soon become unmanageable, penalties can add up, and their credit score can suffer.

Because these products are unregulated, consumers lack many of the protections that they would have with other types of credit.

Last September, Christopher Woolard was asked by the Financial Conduct Authority to consider buying now and paying later as part of a review of the unsecured credit market.

Their report, released yesterday, finds that some are encouraged to make impulsive decisions by the often ambitious buy-now-pay-later advertising and fail to adequately consider the risks of not being able to pay.

With buy-now-pay-later providers starting to partner with higher-value retailers who sell more expensive products, such as appliances and household items, and move to brick-and-mortar stores, there is a risk that consumers will experience problems at the retail level. future.

We must act now to ensure that the people who use these products are properly protected, especially young people at the beginning of their financial journey.

I want to be clear: regulating does not mean prohibiting.

Innovation must be encouraged: it is one of the UK’s strengths and it will propel us outside the EU.

But if we want to reap the benefits of innovative new financial services, we need adequate safeguards against unaffordable debt, and in the case of buy now, pay later, regulation is the answer.

Clients may also file a complaint with the Financial Ombudsman Service.

Meanwhile, experts call for faster action to avoid even more unnecessary debt.

Personal finance expert Alice Tapper, who campaigned for regulation for eight months, says: “ Buy now and pay later providers have been around in the UK for years and this is one case where the regulator struggles to keep up with what are essentially tech companies. .

Labor MP Stella Creasy, who has long called for industry regulation, says: “ The FCA has confirmed what we have been warning the government about for the past year: that the industry’s behavior of buy now pay later presents an obvious risk to consumers and requires urgent action. ‘

Sarah Coles of investment firm Hargreaves Landsdown says: ‘We have waited long enough to give borrowers the protection they need, we cannot afford any more delays. The speed at which the industry is growing means that waiting a few months to take decisive action will expose thousands more young people to the risks of unregulated debt. “

However, experts also emphasize that the new rules will not help customers who have ruined their finances with buy now, pay later.

Laith Khalaf of investment broker AJ Bell says: ‘Unfortunately, some borrowers will be burdened with too much debt, and the new regulation will not help them. It’s okay that providers are regulated, but sadly for some, the damage has already been done. ‘

Buyer Kira Lewis is now struggling to keep up with Klarna payments. The 20-year-old student says, ‘They say your credit score won’t be affected, but mine was because I had to enter my overdraft and use my credit card to keep up with payments.’

Woolard says the regulator acted quickly after the industry boom last year. He says: ‘This is partly a preventive measure. We’ve seen really fast growth in the market and I think it’s absolutely okay to step in now and have that under control. ‘

The move to regulate the industry comes just months after Money Mail reported that four social media stars working for Klarna were under investigation for selling payment credit as a spur in the pandemic.

The Advertising Standards Authority later banned the posts, ruling that they irresponsibly encouraged getting into debt. Klarna admitted that he has ‘missed the mark’ with the post of the influencers.

Businesses that buy now, pay later welcomed the announcement of the regulation yesterday.

Klarna, which has eight million customers in the UK, says it “strongly supports the regulation of the buy now pay later sector in the UK”.

A spokesperson says: “We agree that regulation has not kept pace with new products and changes in consumer behavior and it is now essential that regulation is modern, proportionate and fit for purpose, reflecting both nature Digital Transactions as Changing Consumer Preferences “.

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