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UK watchdog warns over buy now, pay later amid cost of living crunch

·Finance Reporter, Yahoo Finance UK
·3-min read
Members of the public pass by a floor advertisement for tech firm Klarna, a European ecommerce company which allows users to buy now, pay later, or pay in instalments, as the company's valuation fell from $46 billion to $6.7 billion in its latest round of investor fundraising, on 14th July, 2022 in Manchester, United Kingdom. (photo by Daniel Harvey Gonzalez/In Pictures via Getty Images)
Buy now, pay later services allow customers to stagger payments for products with no interest or fees — unless they fail to pay back on time. Photo: Getty

The city watchdog has informed buy now pay, later firms (BNPL) such as Klarna and Clearpay could be committing a criminal offence over misleading and harmful adverts.

Adverts for BNPL — which allows consumers to buy products on credit and pay for them at a later date — could be misleading consumers by failing to warn of the risks of taking on debt they cannot afford to repay, the Financial Conduct Authority (FCA) said.

Companies like Klarna offer interest-free, short-term loans to consumers to help spread payments for goods such as clothes. The loans are unregulated, but the regulator can intervene in how they are advertised.

Read more: One in eight resorted to buy now, pay later credit as cost of living bites

The FCA raised concerns over financial adverts on websites and social media, including “influencers” promoting such products, that could be breaching regulatory rules.

The FCA told BNPL firms and the British Retail Consortium that benefits of BNPL were being emphasised in adverts without fair and prominent indications of any relevant risks.

Some adverts could fail to warn consumers of the consequences of missed payments, the impact on people’s credit scores, and not make clear when charges become payable, the FCA said.

People who opt to buy now, pay later could face late fees if they miss a repayment with some providers, or a dent in their credit rating if details of missed payments are reported to credit agencies.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “As we face a cost of living crisis, consumers are having to make difficult decisions about their finances and how they pay for goods and services.

“Firms need to ensure consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions.

“It is vital that adverts are clear, fair and not misleading.”

Read more: Klarna and your credit report: how buy now pay later will impact your rating

The FCA said it will use criminal and regulatory enforcement powers if it finds promotions are not complying with its rules.

Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Adverts promoting BNPL schemes can be as clear as mud. The worry is an increasing number of people are using such schemes without having a clear understanding of the key considerations.

“Many people are still unaware that BNPL schemes are a form of credit and are guilty of skim reading the T&Cs or simply ticked a box to say they had read them. Customers can be referred to debt collectors and their credit scores could be tarnished if they miss payments.”

Action from the regulator has already led to 4,226 promotions being changed or withdrawn this year.

A Klarna spokesperson told Yahoo Finance UK: "Our advertising promotes responsible spending and our financial promotions already comply with the FCA rules. As a regulated bank our communication is transparent, making it clear we offer credit and the consequences of missed payments, so consumers can make informed choices.

"We share the concerns outlined in the FCA's letter because not all BNPL providers operate to the same high standards as Klarna. We continue to call for proportionate regulation of the sector so consumers are protected regardless of the provider they choose. 

Watch: The risks of buying now and paying later