Buy now, pay later schemes to be regulated to stop millions of shoppers plunging into debt
BUY now, pay later schemes are to be regulated by the financial watchdog to stop millions of shoppers from plunging into debt.
The Treasury announced the plans after a four-month review recommended bringing the sector under stricter rules as a “matter of urgency”.
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Many high-street stores offer the service, including Marks & Spencer, H&M, Uniqlo, River Island and H Samuel, as well as online shops such as Asos.
The schemes, such as Klarna, Clearpay and Laybuy, let customers pay for their shopping in interest-free monthly instalments to spread the cost.
But if you don’t, can’t or forget to make all of the repayments within three months, your debts are referred to a collection agency.
Firms will have to carry out affordability checks before lending when it is brought under the Financial Conduct Authority (FCA).
How to cut the cost of your debt
IF you're in large amounts of debt it can be really worrying. Here are some tips from Citizens Advice on how you can take action.
Check your bank balance on a regular basis – knowing your spending patterns is the first step to managing your money
Work out your budget – by writing down your income and taking away your essential bills such as food and transport
If you have money left over, plan in advance what else you’ll spend or save. If you don’t, look at ways to cut your costs
Pay off more than the minimum – If you’ve got credit card debts aim to pay off more than the minimum amount on your credit card each month to bring down your bill quicker
Pay your most expensive credit card sooner – If you have more than one credit card and can’t pay them off in full each month, prioritise the most expensive card (the one with the highest interest rate)
Prioritise your debts – If you’ve got several debts and you can’t afford to pay them all it’s important to prioritise them
Your rent, mortgage, council tax and energy bills should be paid first because the consequences can be more serious if you don’t pay
Get advice – If you’re struggling to pay your debts month after month it’s important you get advice as soon as possible, before they build up even further
Groups like Citizens Advice and National Debtline can help you prioritise and negotiate with your creditors to offer you more affordable repayment plans
They’ll have to make sure customers are treated fairly, particularly those who are vulnerable or struggling with existing debts.
Shoppers will also be able to report the scheme to the Financial Ombudsman if something goes wrong, and companies will have to act within the watchdog’s rules and guidelines.
The use of buy now, pay later products nearly quadrupled in 2020 and is now at £2.7billion, with five million shoppers using them since the start of the coronavirus pandemic, according to the regulator.
Reality stars and Instagram celebs have been slammed for plugging the schemes to their young followers on social media, without outlining the risks.
Parents were also warned not to use the service to purchase Christmas presents over fears they wouldn’t be unable to repay the costs.
The Woolard Review was chaired by the former interim chief executive of the FCA, Christopher Woolard.
It found that while the popular schemes give consumers a significant alternative to more expensive credit, it also puts them at risk of getting into debt.
For example, more than one in 10 customers of a major bank using buy now, pay later were already in arrears.
Alice Tapper, the founder of the Go Fund Yourself campaign which calls for regulation on the sector, said she was “delighted” that the issues was being dealt with.
Charities Citizens and Advice and StepChange, consumer group Which? and MoneySavingExpert’s Martin Lewis have also been pushing for regulation.
Ms Tapper told The Sun: “Today, BNPL is often a teenager’s first encounter with credit.
How to get help for free
THERE are lots of groups who can help you with your problem debts.
- Citizens Advice – 0808 800 9060
- StepChange – 0800 138 1111
- National Debtline – 0808 808 4000
- Debt Advice Foundation – 0800 043 4050
You can also find information about Debt Management Plans (DMP) and Individual Voluntary Arrangements (IVA) on the and on the Government’s
Speak to one of these organisations – don’t be tempted to use a claims management firm that will claim it can write-off lots of your debts in return for a large up-front fee.
“It is reassuring that the FCA has identified the need for action and I’m delighted by Mr Woolard’s recommendations.
“Regulation means consumers will receive the information and protection they deserve.”
John Glen, economic secretary to the Treasury, said: “Buy now, pay later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become 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.”
It comes three weeks after the government voted down MP Stella Creasy’s amendment to the Financial Services Bill which would have introduced regulation in the coming months.
She said: “The ministers u-turn on tackling these companies is welcome and now needs to be an urgent government priority.”
The report also called for more alternatives to high-cost credit and for financial support to continue to help households whose income has dropped due to the pandemic.
The review also declared that the Individual Voluntary Arrangement’s (IVA) market is “broken”.
Debt companies make high levels of commission – sometimes over £1,000 – for signing up customers to an IVA and there are fears it may not always be the most appropriate option.
It called on the FCA to review the debt market as a whole.
In the last quarter of 2020, the number of people taking out individual voluntary arrangements (IVAs) was up by a shocking 57% compared to the previous three months.
StepChange director of external affairs Richard Lane said he was pleased to see the report focus on how debt problems should be addressed.
Charles Randell, Chair at the FCA, said: “As the market innovates and changes, regulators and legislators need to respond quickly and decisively to protect consumers by facilitating credit where it is beneficial and clamping down on it when it does harm.
“The FCA agrees that there is a strong and pressing case to bring buy now, pay later business into regulation.”
Buy now, pay later scheme Klarna said it “wholeheartedly supports” regulation and it looks forward to working with the industry on this.
A spokesperson said: “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, reflecting both the digital nature of transactions and evolving consumer preferences.”