Buy now, pay later firms such as Klarna face stricter controls

Fears over young shoppers’ debts mean buy now, pay later firms such as Klarna will face more scrutiny by regulators.

These services, offered through major retailers, allow people to split payments instantly and interest-free and are used by millions of people.

But the Financial Conduct Authority (FCA) said it would be easy to build-up unseen debts of £1,000.

Now it will regulate the sector, after use of these services saw a near fourfold rise last year.

Buy now, pay later services were used by five million people in the UK for total sales of £2.7bn. 

However, one in 10 people using them already had debt arrears elsewhere, a wide-ranging FCA review into credit services found.

Economic Secretary to the Treasury John Glen said: “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.”

Chris Woolard, who led the FCA review recommending regulation, said that although buy now, pay later was convenient for some people, for others it was “a really easy way to fall into problem debt”.

This debt would not be seen by credit reference agencies and other lenders.

Under the new plans, providers would need to undertake affordability checks before lending and ensure customers were treated fairly, particularly those who are vulnerable or struggling with repayments.

The government said it would legislate as soon as possible, following consultation.

How buy now, pay later works

These firms allow people to choose – at an online or physical checkout – to pay for items in instalments or, in some cases, defer payments for up to 30 days. Large operators include Klarna, Clearpay, and LayBuy.

They have proved popular with younger shoppers – particular by offering a cheaper way to try before buying or returning. Use of these services rose fast over the course of the pandemic. Estimates suggest £4 in every £100 currently spent in the UK uses buy now, pay later. 

Rapper Snoop Dogg appearing in a Klarna advert
image captionKlarna’s marketing campaigns featuring rapper and investor Snoop Dogg have centred on how “smooth” it makes the payment process

Debt charities and campaigners have argued advertising via social media, often through influencers, has glamorised debt. They also suggest the services can make it too easy to fall into debt, and – while total debts are not huge – there are risks of unaffordable borrowing.

These companies do not charge interest and they argue they are more payment providers than credit firms. They have not fallen under the same level of regulation as other credit providers, such as credit card or loan companies who require FCA approval to lend and must conduct affordability checks.

At present, anyone who has a complaint regarding a financial problem with a buy now, pay later firm is unable to take their case to the financial ombudsman for an independent adjudication. This should now change.

Alice Tapper, who campaigned via social media for a change to the rules, said: “It was the hundreds of people who shared their story with the campaign who made it painfully clear that the absence of regulation is at the expense of consumers, particularly those who are young and vulnerable.”

‘A sticky situation’

Sophie Edwards is a follower of fashion, but it is a dedication that left her in debt.

She spent thousands of pounds on clothes, using buy now, pay later services, but then found herself “in a sticky situation” when she was made redundant.

“I was using it for retail therapy, to make myself feel better,” she said. “It did not feel like real money.

“You can just go shopping on a Monday, a Tuesday and a Wednesday.”

By Kevin Peachey
Personal finance correspondent

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