The 'buy now, pay later' financial services industry will face stricter regulation following a review by the UK Financial Conduct Authority.
When you go to make a significant purchase online, many online stores now offer some form of 'buy now, pay later' or cost-spreading solution such as Klarna, LayBuy, or Clearpay. These schemes have rapidly grown in popularity in recent years and until now they haven't been strictly regulated.
Unlike a regular credit agreement or loan, 'buy now, pay later' services don't charge the customer interest or involve a serious credit check. They make their money instead by charging the retailer a fee, and the retailer sees increased sales because people are more likely to buy expensive goods if they can spread the cost.
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Concerns have been raised that it could be too easy for people to get into debt using services like Klarna as they don't carry out strict affordability checks. Another problem is that this is still a form of credit but it can't be seen by lenders or credit agencies, so banks could be making decisions about loans with incomplete data.
The average user of these services is under 35, with women accounting for 75% of all users and around 90% of sales being in fashion. This has raised further concerns that services such as Klarna could be a young person's first interaction with credit and they may not be being advised adequately.
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A new FCA review has recommended stricter regulation of the 'buy now, pay later' side of the financial services industry, and the government is now launching a consultation into new legislation on the matter. New plans include requirements to carry out affordability checks before approving credit, and ensuring that customers struggling to pay are treated fairly.
Shoppers with disputes should also be able to engage with the financial services ombudsman, while currently they have little recourse. Some customers who lost their jobs during the pandemic have suddenly found themselves unable to meet repayments, and until now there were very few protections in place for them.
Source: BBC News
