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Buy now, pay later firms to be regulated – and all shoppers will face affordability checks

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Buy now, pay later firms, including the likes of Klarna and Clearpay, are to be regulated – and all shoppers will face affordability checks before taking out this type of credit. The shake-up also means borrowers with complaints will be able to take cases to the Financial Ombudsman Service. 

The announcement from the Government is a campaigns win for MoneySavingExpert.com and its founder Martin Lewis, who, along with other campaigners, have long called for the "explosive" industry to come under the financial watchdog's eye to protect consumers. Watch Martin's evidence session to the Treasury Committee in December 2020 where he called for regulation at "maximum speed". 

The Government's decision to regulate buy now, pay later firms coincides with the publication of a wider review of the unsecured credit market, which was commissioned by the regulator the Financial Conduct Authority (FCA) and led by its former interim chief executive, Christopher Woolard.

The 'Woolard Review', which MSE's head of campaigns Kirsty Good was on the advisory panel for, also called for buy now, pay later regulation. We've more on its recommendations below, and you can also read Mr Woolard's guest comment, written for MoneySavingExpert, on why he told the Treasury to regulate buy now, pay later.

'Regulation is crucial to ensure consumers are treated fairly'

Martin Lewis, founder of MoneySavingExpert.com, said: "There has been an explosion of buy now, pay later (BNPL) lending over the last few years, often targeted at young people, pushed via Instagram and social media, as if it is a form of lifestyle therapy. It isn't. It's debt. In fact, it's the fastest-growing form of credit in the UK and regulation is crucial. 

"For years, I and others made similar calls about payday loans – they too were purported to be 'filling a gap', and about 'technology, not borrowing' – and the sloth-like delays to dealing with that led to financial nightmares for millions.

"That's why I strongly support regulation, and regulation at speed. BNPL isn't as bad as payday lending – done right, used right, it's interest-free. Indeed, it can be a useful tool. However, it's been sold to retailers as an easy way to get people to spend more – this, combined with the younger demographic who use BNPL, is a massive red flag. 

"Regulation isn't about killing the industry, it's about putting controls on product design and marketing, to ensure that over-borrowing doesn't ruin lives, and that consumers are treated fairly. And most importantly for me, it means people would have a right to take any complaints to the free and independent Financial Ombudsman Service."

Buy now, pay later is a simple concept: instead of you paying at the till or online checkout, the BNPL firm pays the retailer for you. You then agree to pay the BNPL firm back over a few weeks or months, meaning you can spread out your shopping costs. It's interest and fee-free but miss a repayment and you risk being charged late fees, which can in turn have a negative impact on your credit score. 

Affordability checks will be required

Use of BNPL products nearly quadrupled in 2020, with five million people using them since the start of the coronavirus pandemic, according to the FCA. While the average transaction tends to be relatively low, shoppers can take out multiple agreements with different firms - and the Woolard Review found it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see. The review also found that more than one in 10 customers of a major bank using BNPL were already in arrears.

The Woolard Review recommends bringing interest-free buy now, pay later products under FCA supervision - and that's something the Treasury said today it intends to do. Under the Government's proposed new rules, lenders will be required to carry out affordability checks on all customers and ensure they are "treated fairly" - particularly those who are vulnerable or struggling with repayments.

Current affordability rules do not require firms to conduct so-called 'soft' or 'hard' credit checks before giving out credit, although many lenders do in practice. The FCA says it's currently up to lenders to judge what information they need to be satisfied that a loan is affordable, and it is also down to lenders whether to pass loan info onto credit reference agencies. 

You'll also be able to take complaints to the Ombudsman

Once the Government proposals announced today are implemented, customers who have any problems with a buy now, pay later service will be able to escalate their complaint to the free, independent Financial Ombudsman Service. This is something they can't currently do.  

The changes won't take force just yet though  

Although the Government's announced today it intends to regulate buy now, pay later firms, we don't yet have a clear timescale for when this will happen. The next step is for the Government to launch a consultation on how it should implement regulation, and to ensure its approach is "proportionate". Once this consultation is complete, the Government says it plans to bring forward new laws "as soon as parliamentary time allows".

John Glen, economic secretary to the Treasury, said: "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." 

Stella Creasy MP, whose call for BNPL regulation was last month rejected in Parliament - and whose action saw three Klarna adverts banned in December 2020 - added: "The U-turn on tackling these companies is welcome and now needs to be an urgent Government priority. Just like with payday lender Wonga, the consequence of any further delay could be catastrophic."

Other key recommendations from the Woolard Review

As part of its wider investigation into the unsecured credit market, the Woolard Review also made several other recommendations to the financial regulator and to the Government, including calls to:

  • Improve access to debt advice and debt solutions. The report urged the FCA to act “without delay” to ensure suitable debt solutions are available. In particular, it called for an emergency fund to be established to pay the £90 debt relief order (DRO) application fee on behalf of those who can’t afford it - or for the Government to look at reducing or removing the fee altogether. 

    A DRO is a type of debt solution, granted by the Insolvency Service, for people on low incomes with debts of less than £20,000. A DRO freezes your debt repayments and interest for 12 months. If your financial situation hasn't changed by the end, then your debts are written off. See our Debt Solutions guide for more info. 

  • Closely monitor Employer Salary Advance Schemes (ESAS). These salary advance schemes let workers access some of the pay they have already earned before their regular payday, often for a fee. While not very common, they are currently offered by some employers in the hospitality, retail and healthcare sectors. 

    The report highlighted some of the risks these services pose, such as the cross-selling of unsuitable financial services products. It suggested the FCA work with the Government to encourage ESAS providers and major employers to draw up a code of best practice.

  • Review how coronavirus-related financial help is recorded on consumers’ credit files. If you've received more than six months' worth of help with mortgage repayments due to the crisis this will be reported to credit reference agencies. But the report says the FCA needs to look at whether information is recorded in a “consistent and adequate” way, and whether it could “better reflect” individual circumstances. See our Coronavirus Finance and Bills guide for further help if you're struggling. 
  • Improve information sharing across the credit sector more broadly. The report identified a series of potential changes in credit reporting for the regulator to consider, such as making reporting mandatory for financial firms and requiring creditors to report when County Court Judgement debts have been repaid. As part of this, the review also called on the FCA to investigate the effectiveness of 'credit builder' products.
  • Support alternatives to high-cost credit. The report called for the removal of restrictions on credit unions and community lenders so they can offer more products in future. It also stressed the need for the FCA to drive awareness of the alternatives to high-cost credit, as well as the risks of illegal money lending. It added that the FCA should encourage mainstream lenders to offer their own high-cost credit alternatives.

  • Consider a more structured and prescriptive approach to 'forbearance'. The report says this should include the FCA looking at putting in place tighter rules around the financial help firms need to offer those who are struggling. 

The Government says it will now examine these proposals and respond in due course. The FCA said it plans to build the review’s recommendations into its upcoming business plan for 2021/22. 

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