Britain’s financial watchdog has been told to urgently get a grip on the “buy now, pay later” credit market, which has ballooned in size during the pandemic.
The Financial Conduct Authority (FCA) on Tuesday published the Woolard Review into the unsecured credit market. The 68-page report, authored by the FCA’s former chief executive, makes over 20 recommendations for how to reform the unsecured lending market, chief among them a call to “urgently” start regulating “buy now, pay later” (BNPL) credit providers.
The government swiftly responded by saying it would hand new powers to the FCA to control the market.
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“New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty,” said Christopher Woolard, former interim chief executive of the FCA and chair of the review.
“Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic.”
BNPL products allow consumers to buy a product online by putting in just a minimum amount of details online, such as phone number and email address. They then make phased future payments to pay off the cost. Popular providers include Sweden’s Klarna and ClearPay, both of which work with brands like Asos (ASC.L) and Boohoo (BOO.L), and Australia’s Afterpay.
The use of BNPL quadrupled in 2020, the Woolard Review found, growing from almost nothing to around 1% of the UK credit market. Over 5 million people have used this kind of payment plan since the COVID-19 pandemic began and the market is now worth £2.7bn ($3.7bn). BNPL providers typically don’t charge interest, meaning they are not covered by existing credit regulation.
Service providers argue their interest-free payment plans make it easier for consumers to manage their money. However, campaigners have concerns that BNPL agreements mean consumers can lose track of how much they owe and contribute to problem debt. Labour MP Stella Creasy last month called the market a “financial scandal waiting to happen.”
Woolard said people “shouldn’t demonise” BNPL but said the market was “laced with problems”. The lack of communication within the industry means consumers can easily run up debts of up to £1,000 by taking out plans with various different providers, he said.
“They’re all effectively flying blind to some degree,” Woolard told journalists.
One in ten users of BNPL services are also already in arrears with their banks, meaning they shouldn’t be given credit. Many borrowers do not understand that BNPL is a form of credit.
Woolard said calls for regulation were largely “preventative” after learning lessons from the scandals that followed the growth of the payday loans industry.
“It’s absolutely the right thing to step in now and get that under control,” he said. “You can only see this growing in popularity.”
The Woolard Review recommended bringing BNPL providers under existing regulation for credit providers. That would mean firms could face sanctions and fines for breaching rules, proper affordability checks would be required and consumers could seek official redress if things go wrong.
“Essentially this would put them on a level playing field,” Woolard said.
FCA chair Charles Randell welcomed the review’s findings and said there was “a strong and pressing case” to regulate the BNPL industry. The FCA board has written to the Treasury asking it to overhaul legislation to bring BNPL into the FCA’s mandate. The Treasury backed the recommendations on Tuesday morning.
“Buy-now-pay-later can be a helpful way to manage your finances but it's important that consumers are protected as these agreements become more popular,” John Glen MP, economic secretary to the Treasury, said in a statement.
“By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”
Anthony Morrow, cofounder of online financial advice service OpenMoney, said he was “delighted” by the decision to regulate the sector.
“We have long argued that Buy Now Pay Later (BNPL) schemes, like Klarna and ClearPay, make it very easy to take on debt without fully thinking about how to pay it back or the implications if you don’t,” he said.
“Our research found that 77% of users have struggled to pay back the money for purchases made using BNPL. Without adequate regulation, these schemes are putting consumers at risk of serious financial harm, especially in the current economic uncertainty.”
As well as calling for BNPL regulation, the Woolard Review urged the FCA to improve funding for debt advice, expand its pandemic-era forbearance policies for the recovery phase, and encourage more alternatives to high-cost credit.
UK householders have more than £250bn in outstanding unsecured debt. Over 40 million people used consumer credit services in 2019.
“Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses,” Randell said in a statement. “While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households.
“Many people have been able to reduce their debts, but some of the poorest in our society have exhausted any savings or run up more debts.”
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