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Klarna customers set to get more protection

Written by: Emma Lunn
Buy now, pay later (BNPL) lenders such as Klarna, Clearpay and Laybuy could become regulated next year.

The Financial Conduct Authority’s (FCA) business plan for 2021/22 includes new protection for borrowers through regulation of BNPL which it refers to as ‘deferred payment credit’.

The regulator plans to consult on new rules in 2022 and is developing an approach to supervising BNPL and deferred payment credit lenders. The BNPL market more than trebled in size during 2020.

The news comes as rumours circulate that Apple plans to launch Apple Pay Later which will let users split the cost of purchases in a similar way to Klarna. According to news reports, the feature would let Apple Pay users split their payments into four interest-free instalments, or across several months with interest.

The FCA also plans to introduce new rules so that people with debt problems are treated fairly, that debt advice is fair and effective, and that people know about alternatives to high-cost credit.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Many of us did whatever we had to do in order to get through the pandemic, and in some cases, this included taking on an awful lot of debt.

“The FCA is worried that if we’ve done any of this using unregulated buy-now-pay-later providers like Klarna and Clearpay, we may not even realise we’ve borrowed money, and could face risks that we’re entirely unaware of. It’s also worried that people who have maxed out all their available borrowing could run into real trouble when the furlough scheme comes to an end, and that lenders and some debt advice companies risk making their problems even worse.”

Several investigations have rung alarm bells over BNPL, with some highlighting the fact people didn’t really think of it as borrowing, so didn’t give it the same kind of thought they would when taking on other types of debt. A report by Which? found that BNPL was regularly being used by people experiencing financial stress.

The basic credit assessments associated with BNPL borrowing means people can take on a huge number of these arrangements, and run up significant debts, without considering whether they can afford them.

One bank told the FCA that of the 677,000 of their current account customers who made a payment to two of the large BNPL providers in November 2020, 10% had also exceeded their overdraft limit in the same month.

Coles said: “The FCA plans to consult on regulating this market in 2022, and while this is a welcome development, the timescales involved mean there’s a good chance that many more vulnerable borrowers will be put at risk in the interim. Five million people had used this kind of borrowing between the outset of the pandemic and the Woolard Review just under a year later, and the size of the market trebled during 2020 alone. The sooner it starts regulating the sector, the better.

“It has also promised to keep a close eye on how borrowers are treated when they fall into financial difficulty – particularly vulnerable people – and examine the help they’re offered now that industry-wide coronavirus support has been phased out. If lenders fall short, they’ll be tackled individually, but it’s not ruling out setting new rules too.”

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