Woolard review: FCA cracks down on £2.7bn buy-now-pay-later market
Interest-free buy-now-pay-later credit agreements will be regulated by the City watchdog after the market swelled to £2.7bn last year.
The plans, drawn up by the Financial Conduct Authority (FCA), have been designed to protect consumers, after the use of buy-now-pay-later (BNPL) transactions tripled in 2020, as shoppers looked for ways to spread their money further during the pandemic.
The decision was made as part of an FCA review into the unsecured credit market, carried out by former interim chief executive Christopher Woolard.
By regulating the products, consumers will be able to seek recourse with the Financial Ombudsman Service, should they have a complaint.
The likes of Klarna and Clearpay have enjoyed rapid growth thanks to their popularity among millennial audiences shopping with online retailers such as Asos, Topshop and JD Sports.
The FCA said there had been 5m transactions made through BNPL firms, forming one per cent of the credit market.
Under the regulatory plans, providers will be subject to FCA rules so will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.
Swedish platform Klarna, which recently secured a $11bn valuation, welcomed the review. “As a fully licensed bank, Klarna is very comfortable operating in a regulated environment and wholeheartedly supports the regulation of the buy now pay later sector in the UK.”
“We agree that regulation has not kept pace with new products and changes in consumer behaviour and it is now essential that regulation is modern, proportionate and fit for purpose”.
Leading BNPL firm Clearpay also welcomed the recommendations: “We are pleased that many of the suggestions we put forward in our submission to the Woolard review have been acknowledged and that the review has recognised the diverse nature of the industry.”
Campaigners welcome increased scrutiny
Debt charity Stepchange which has long called for more scrutiny on firms like Klarna today welcomed the FCA’s review.
“While the FCA has made good progress on historic credit problems, this is still a market that risks causing harm to financially vulnerable people, and it is telling that the Covid-19 period has thrown so many of the residual issues into sharp relief.”
“We thoroughly welcome the energetic focus on an outcome-based approach for consumers, and the notable emphasis on addressing problem debt.”
Consumer champion and founder of Money Saving Expert Martin Lewis said as the “fastest-growing form of credit in the UK and regulation is crucial”.
“There has been an explosion of buy now, pay later 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.”