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‘Buy now pay later‘ (BNPL) firms are facing a crackdown amid fears they are helping shoppers to purchase items they can not afford, resulting in increased levels of debt.
Companies such as Swedish outfit Klara, which are particularly popular with young people, are to be regulated by the Financial Conduct Authority (FCA), the Treasury announced on Tuesday.
The move comes following a review of the unsecured credit market and increased popularity of the companies by former FCA chief executive Chris Woolard.
John Glen, economic secretary to the Treasury, said: “Buy now pay later can be a helpful way to manage your finances but there is a real risk that consumers could be harmed as these agreements become ever more popular.
“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.”
BNPL services are available to customers through some large retailers and allow people to split payments immediately and interest-free.
But consumers do not view interest-free and BNPL services as a form of credit, so do not apply the same level of scrutiny to the agreements.
Checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer, the FCA said, adding that it would be easy for customers to build-up unseen debts of £1,000.
Millions of people across the UK use BNPL services and their popularity has ballooned during the Covid-19 pandemic.
The number of BNPL transactions has tripled in 2020, and “there is now a significant risk that these agreements could cause harm to customers,” according to the FCA.
Campaigners have previously accused BNPL of using “predatory tactics” to encourage young people to use their services.
Klarna once used Snoop Dogg in an advertisement to promote its scheme, with the rapper telling viewers how “smooth” the service can make paying.
Martin Lewis, the financial campaigner, earlier this year said he was worried that increased use of BNPL schemes could “catastrophise the finances of young people”.
Klarna said it welcomed the findings of the review and that it is the “right time” to regulate the BNPL sector.
Alex Marsh, head of the firm’s UK operations, said he did not accept companies like his encouraged people to get into debt.
“The shift we see in consumers towards BNPL products such as ours is the opposite – they see it as a way to spread the cost of a purchase but have very structured payments, over one two or three salary cycles.”
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