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15 Jan 2021

MPs reject call to speed up regulation of new 'buy now, pay later' providers

Find out why we think it's a missed opportunity

MPs have rejected calls to speed up the regulation of 'buy now, pay later' (BNPL) providers, after a vote in Parliament.

BNPL soared in popularity during 2020, with companies such as Klarna, Clearpay and Laybuy partnering with high street and online retailers to allow customers to spread the cost of their shopping.

There are concerns, however, that BNPL schemes are encouraging people to spend more, and that a lack of regulation could lead to an increasing number of consumers building up unmanageable debts.

Here, Which? explains how BNPL works and why we're calling for the regulator to be given more powers to intervene in the market.

Have you ever had an issue with a BNPL scheme? Tell us about it using our new BNPL complaints form.

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How does BNPL work?

BNPL companies have become increasingly visible at the checkout of online and high street shops in the last year.

They offer customers the opportunity to pay for their shopping in interest-free weekly or monthly instalments rather than up front.

Here's how some of the biggest schemes work:

  • Klarna:available with retailers including H&M, JD Sports and Warehouse. Customers can spread the cost of their purchase by paying in three instalments (one every 30 days).
  • Clearpay:available with retailers including Marks & Spencer, Asos and Boohoo. Allows purchases to be paid in four instalments (one every two weeks).
  • Laybuy: available with retailers such as JD Sports, Footasylum and Zavvi. Allows customers to pay in six weekly instalments.

The problem with BNPL schemes

BNPL lenders aren't currently regulated by the Financial Conduct Authority (FCA) because they don't charge interest. This means providers don't need to display wording about the risks involved, and the FCA doesn't have the power to intervene if customers are treated unfairly.

However, while there is no interest there are other dangers to be aware of if you miss payments. Some schemes charge late payment fees as high as £12 and others refer unpaid bills to a debt collection agency.

BNPL schemeWhat happens if you don't pay?
PayPalIf your repayment fails and you take no action to resolve the situation, you will incur a £12 late fee.
KlarnaKlarna doesn't ever charge late fees with 'Pay in 30 days' or with its 'Pay Later in 3' option. If you choose to 'Pay Later in 3' and don't have enough money in your account on the agreed repayment dates, Klarna will try again after seven days. And if this payment fails, it will then try again in a further seven days. If the debt remains unpaid after several months, your information could be passed on to a debt-collection agency.
ClearpayThe initial late fee for a missed repayment is £6. A further £6 is then taken if the payment remains unpaid seven days after the due date. Orders below £24 are subject to a maximum late fee of £6. For orders above £24, late fees are capped at 25% of the original order or at £36 - whichever is less.
LaybuyIf you don't make a payment on its due date, you then have a further 24 hours to pay, or you'll be charged another £6 fee. And if you don't make the payment within the next seven days, you'll be charged a further fee of £6. If you continue not to pay they may arrange for a debt-collection agency to collect the amount owed.

The lack of prominent risk warnings could result in shoppers building up debts. In a recent survey, we found 40% of people who were aware of BNPL didn't know that firms may employ debt collection agencies if they fall behind on payments. In addition, missed payments with some BNPL firms can leave a negative mark on credit reports for at least six years.

And as we mentioned earlier, there's evidence that BNPL encourages customers to spend more. Clearpay, for example, claims that firms who use its service get a 30% boost in the value of orders, while our survey showed nearly 24% of shoppers spent more than they had planned because the service was available.

MPs resist calls to speed up BNPL regulation

The FCA is currently looking into BNPL as part of its inquiry into unsecured credit, but MPs have expressed concerns that any new regulations may take up to 18 months to come into force.

On Wednesday 13 January, a group of more than 70 MPs brought an amendment to the Financial Services Bill in Parliament, in an attempt to force the Treasury to introduce regulations on BNPL within three months.

The proposal was led by the Labour MP Stella Creasy, who said a delay could have significant consequences.

Ms Creasy said: 'The lesson from [collapsed payday loan firm] Wonga is the longer we take to act, the more people get into unaffordable debt. It's not by accident that these companies make money from people spending more than they can afford'.

Other MPs highlighted younger consumers are particularly at risk and some may not view BNPL products like debt, as there are no credit checks.

However, the amendment was rejected by 355 to 265 votes.

Rejection a missed opportunity to regulate BNPL

In December, we called for the FCA to be given new powers over BNPL. We believe the rejection of the amendment marks a missed opportunity to regulate the BNPL market.

Gareth Shaw, head of money at Which?, says: 'Our research shows the BNPL market can encourage some people to spend more than they can afford, potentially building up large debts that they will struggle to pay off.

'The market is booming at a time when people's finances are more stretched than ever, and the need for regulation will only grow.

'The government should act swiftly to give the FCA the responsibility to regulate this sector, to ensure that consumers are not harmed and that action can be taken if firms are treating customers unfairly.