Buy now, pay later firms which offer short repayment periods are to face more scrutiny by The Financial Conduct Authority (FCA) following a review by the government. These services allow customers to split payments and are initially interest free. This enables the customer to pay for items in instalments, with some allowing up to 30 days deferment to pay for goods.
Use of these services such as Klarna, Clearpay and LayBuy has risen during the pandemic with estimates suggesting that £4 in every £100 is being spent on buy now pay later services.
The Financial Conduct Authority (FCA) estimates that approximately five million people in the UK have used these services with the total sales figure being approximately £2.7bn. They warned of how easy it is for customers to generate unseen debt and as a result of their review, they are now going to regulate these companies.
It was revealed by the FCA review into these credit services that 1 in 10 people using these companies already had debt arrears elsewhere. These debts are not seen by credit reference agencies and lenders and, although the use of these companies might be easy and convenient, it’s also very easy to generate more debt.
Better Protection For Customers
At present customers that have a complaints regarding financial problems with a buy now, pay later firm are unable to take their case to the financial ombudsman for an independent adjudication. Plans to regulate these firms will allow them to pursue any complaints with the financial ombudsman.
Under the new plans announced by the Economic Secretary to The Treasury, customers will only be offered agreements that they can afford as is the case for other loans. These plans will also allow customers to pursue any complaints with the financial ombudsman.
In the future customers will have to undertake affordability checks before lending to ensure that customers are being treated fairly and won’t be allowed to take out loans that they can’t afford.
Alex Marsh, the UK head of Swedish company Klarna has 10 million customers in the UK stated that:
“now is the time for regulation”.
He went on to say that the company has worked with those who have fallen into debt, but missed payments could be forwarded to debt collectors to collect. With job losses and furlough, more people have been turning to Buy Now Pay Later firms to purchase things such as white goods or large furniture,
Gary Rohloff, managing director and co-founder of the Buy Now Pay Later firm Laybuy, which has 400,000 UK users, stated:
“ We believe we are already in a good place when it comes to regulation. There needs to be a balance to protect consumers, but also make sure it retains the innovation and simplicity that consumers value.”
The government has stated that they are looking to legislate these firms as soon as possible following the consultation. This will be seen as a step in the right direction to help protect consumers from being exploited by firms offering initial low rates followed by sky high charges for those who fall behind their payment schedule.
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