UK’s FCA Will Now Regulate the BNPL Sector
With the emergence of the Coronavirus pandemic, more and more people have come to depend on buy now pay later firms such as Klarna and Affirm. In 2020, the use of the buy now pay later industry has experienced exponential growth, as BNPL providers grow into multi-billion dollar contenders. As a result, the UK’s Financial Conduct Authority is set to put new rules into place surrounding buy now pay later firms. This decision comes as a result of growing fears of debt burden for cash poor shoppers.
As the world moves forward into unknown territory, there is growing concern surrounding the unaffordable debt consumers have recently incurred. With five million people utilising BNPL products since the start of the pandemic, BNPL firms have quadrupled in popularity throughout 2020, sitting pretty at £2.7 billion in the UK alone. Unregulated BNPL products provide consumers with the opportunity to utilise more expensive credit, with a potential consequence of significant consumer harm. According to figures, one in ten major bank customers who utilised a BNPL provider, were already in significant debt.
“Changes are urgently needed in order to bring BNPL into regulation to protect consumers – to ensure there is secure provision of debt advice to help those who may need it – and to maintain a sustained regulatory response to the pandemic’, says Christopher Woolard.
Comparethemarket.com has published new figures which indicated 20% of all Brits utilising a BNPL provider are now unable to meet repayment agreements. These debts were primarily used to fund their Christmas shopping in 2020. Another survey showed 44% of British BPNL users are also now concerned about their ability to repay the loans that funded their Christmas gifts. Nearly 30% of respondents utilising a BNPL scheme felt it made them spend more than they normally would have – with 40% having purchased more expensive gifts.
Nearly one third of all Christmas shoppers using a BNPL firm in 2020 claimed they did so in order to defer payments, as 23% stated that a buy now pay later scheme fit their financial needs best – especially when compared to credit cards. The fact of the matter is that most consumers could not afford their holiday purchases upfront, and ended up going over their budgets. Surveys say Capco’s recent research discovered individuals using a BNPL scheme have missed payments, especially for those within the age range of 18 and 34. However, with buy now pay later firms influencing consumers to spend more, the chances of people going further into debt has increased significantly.
“Free debt advice services need secure, long-term funding as demand increases to as many as 1.5 million additional cases, following the pandemic. Funding needs ot be in place to help the poorest pay fees when applying for debt relief orders”, states the watchdog.
The regulator stated “More should be done to encourage mainstream lenders into this space. In addition to making sure products are affordable, there should be an increased focus on lenders meeting consumers needs, for as long as they hold the product”.
The provision of debt advice will play a critical role, in the long term, toward a more sustainable market, according to the FCA. In order to ensure the vulnerable are treated with fairness, lenders will be required to complete affordability checks on all customers. The FCA ensures it will also work in unison with the Government and Bank of England, in order to reform credit union, and Community Development Finance Instutitions regulations.