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Klarna and other ‘buy now, pay later’ firms set for UK regulatory clampdown

The FCA is planning a regulatory overhaul to the BNPL sector following incredibly strong growth in recent years.

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One of Europe’s most highly valued fintech unicorn Klarna, along with a host of other buy now, pay later’ firms are facing tougher regulation in the UK.

The Financial Conduct Authority (FCA) has published the long-awaited review from Christopher Woolard, the former interim CEO of the FCA, this morning, calling for tighter regulation of buy-now-pay-later (BNPL) firms.

In the update posted this morning, HM Treasury said: “Buy-now-pay-later products are rapidly increasing in popularity, with the volume of transactions tripling in 2020 as the pandemic drove online shopping, and there is now a significant risk that these agreements could cause harm to consumers.”

“By announcing plans to legislate to bring interest-free buy-now-pay-later into regulation, the government is acting swiftly to ensure people can continue to benefit from these products with the right protections.”

BNPL found its way into the mainstream in 2020 as more people turned to the fee-free credit option to help fight the Covid-19-related tightening of the purse strings, however, it wasn’t without its bumps.

At the beginning of December, Capital One became the first major bank to block BNPL credit card transactions, with the US bank describing such transactions as “risky for customers and the banks that serve them.”

Just three weeks after Capital One applied the brakes to BNPL, the Advertising Standards Agency (ASA) branded four Klarna ads as ‘irresponsible’ after several influencers posted ads for the fintech linking spending (and borrowing) money with happiness.

This morning, following the news of tighter regulation, Alex Marsh, head of UK at Klarna, 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."

"This is why we welcomed Woolard Review into change and innovation in the unsecured credit market, we have fully engaged in this process and we now look forward to working together with the FCA, government and the wider sector to build a modern regulatory and supervisory framework that delivers the best outcomes for customers."

The review, which was first announced back in September 2020, is an investigation into the unsecured credit market, which includes the likes of buy-now-pay-later fintechs Klarna,Zilch and Clearpay.

Jonathon Segal, head of fintech and alternative finance at Fox Williams, told AltFi: “This news is totally unsurprising, given that we were sure that something was due to come out.”

"I think the bigger BNPL firms will be in a good position to move quickly as and when the regulation hits, but the issue in the market is that, because it's going to be regulated lending, the merchants using BNPL will also have to be regulated as credit brokers. They'll either be directly regulated by the FCA or will become an appointed representative of a BNPL firm."

Despite the promise of tighter restrictions, it’s still unclear exactly what form the regulation might take.

Freddy Kelly, CEO and co-founder of Credit Kudos, said: “All lenders have faced challenges in assessing an individual's affordability in these uncertain times, with traditional credit reports providing limited information on someone’s current financial situation.”

“But too often we hear of people getting into difficulty repaying BNPL loans or not understanding that this type of borrowing could affect their credit rating. The Woolard Review is absolutely right to recommend this sector comes under regulation and we strongly welcome the Government’s announcement today confirming this, bringing consistency to the lending market.”

Echoing the call for regulation from the likes of Klarna, a cross-party campaign from several MPs gained traction urging the Financial Conduct Authority (FCA) to regulate BNPL firms, like Klarna, a bill that has since been rejected by Parliament.


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