Shop now pay later companies like Klarna and Block’s Afterpay could face tougher rules in the UK
Nikolas Kokovlis | Nurphoto | Getty Images
Britain’s new Labor government will soon draw up updated plans to regulate the “buy now, pay later” industry, a government spokesman told CNBC.
A Treasury spokesman said the government would do so “soon”, echoing earlier comments by Tulip Siddiq, the UK’s new finance minister, in parliament on Wednesday.
“Regulating Buy Now Pay Later products is vital to protecting people and providing certainty for the industry,” a Treasury spokesman told CNBC via email on Thursday.
Earlier this week, Siddiq, who was chosen as the UK’s new cities minister after Keir Starmer’s Labor Party’s landslide election victory, told lawmakers that the new government “seeks to work closely with all stakeholders and will present her plans soon. “
This follows multiple delays in the roadmap for BNPL legislation in Britain. The government first unveiled plans to regulate the industry in 2021. This followed a review by the former head of the Financial Conduct Authority, Christopher Woolard, which found that more than one in 10 BNPL customers were in arrears.
BNPL schemes are flexible credit arrangements that allow a consumer to purchase an item and then pay off the debt at a later date. Most plans charge customers one-third of the purchase value up front, and then receive the remaining payments over the next two months.
Most BNPL companies make money by charging commissions on a per-transaction basis to their trading partners, as opposed to charging interest or late payment charges. Some BNPL companies charge non-payment fees. But the model is not standardized across the board.
This disparity in services between various BNPL lenders is partly why activists are calling for regulation. A key reason, however, is that people — especially younger consumers — are racking up more and more debt from these plans, sometimes from multiple providers, without being able to afford it.
Gerald Chappell, chief executive of online lending company Abound, which uses consumer bank account information to inform credit decisions, said he had seen data processed through his company’s platform showing customers raising “thousands of pounds”. from three to four BNPL providers.
While BNPL can be considered a credit “innovation,” Chappel said, “there’s a part of me that can’t help but feel that it was a product of a zero interest rate environment. And now you’re going into a higher interest rate environment: is it still sustainable?”
“You’ve got a weaker economy, more credit defaults. You’ve got a huge accelerated adoption of buy now, pay later, which is also increasing debt burdens. So I think a lot of these companies are struggling and will continue to struggle.”
Chappell said he would not be surprised if the Financial Conduct Authority, which is responsible for financial regulation in the UK, ends up regulating the BNPL sector within the next 24 months.
Multiple delays in BNPL rules
Executives at two major BNPL companies, Klarna and Block, withdrew these proposed measures, saying they threatened to drive people into more expensive credit options such as credit cards and car finance schemes.
A spokesman for Clearpay, the UK arm of Afterpay, said the company welcomes the government’s announcement that it plans to make an announcement on the BNPL settlement soon. Afterpay is the Jack Dorsey-owned fintech arm BNPL block.
“We have always called for fit-for-purpose regulation in the sector that prioritizes customer protection and delivers much-needed innovation in consumer credit,” a Clearpay spokesperson told CNBC via email.
“Clearpay already has safeguards in place to protect consumers, but we recognize that not all providers have the same approach. That’s why we continue to support proportionate and appropriate regulation that sets high industry standards across the board.” , this representative added.
A Klarna spokesperson told CNBC via email that the company has “supported the BNPL arrangement for a long time, ensuring clear information, protection from bad actors and access to zero-cost credit.” “We are pleased that the government has committed to introducing it so soon after taking office,” they said.
“Many lenders offer uncontrolled BNPL which in turn does not affect their customers’ credit scores, meaning other responsible lenders don’t have the full picture, so consumers don’t get the safeguards they deserve,” said Philip Belamant. CEO of BNPL company Zilch. “It is time to level the playing field and remove this exemption. Regulation of this important area is long overdue.”
PayPalwhich also offers payday loans in the UK, was not immediately available for comment when contacted by CNBC on Thursday.
BNPL loans are a largely unregulated part of the financial services ecosystem, not just in the UK, but globally. In the United States, the Consumer Financial Protection Bureau said that customers of BNPL companies should be offered the same protection as credit card users.
The regulator unveiled an “interpretative rule” for the industry, which means BNPL lenders such as Klarna, Affirm and PayPal must issue refunds for returned products or canceled services, must investigate commercial disputes and stop payments during these investigations and provide accounts with charge disclosures.
