Buy now pay later firms to face tougher rules from next July
Buy now pay later providers Klarna and Afterpay are set to face tougher rules by the Financial Conduct Authority (FCA) next year after much to-ing and fro-ing between fast-growing firms and regulators.
The FCA has revealed new rules will kick in on 15 July next year.
Buy now pay later entrepreneurs and other consumer groups will still be able to share views with the City regulator until September.
The new date follows the UK government’s unveiling of legislation aimed at regulating the providers.
Lenders will now have to check that consumers can afford to repay them under new proposals put forward by the FCA and the government.
They will also be required to offer people support if users of loans get into financial difficulty, with borrowers able to make complaints to the Financial Ombudsman Service if agreements break down.
Sarah Pritchard, deputy chief executive at the FCA, said people would be able to benefit from products “while being protected” from next year.
“Our regulation will help consumers navigate their financial lives, with checks on whether they can afford to repay, support when things go wrong and access to the right information to make informed decisions.”
Buy now pay later firms will ‘work with FCA’
A Klarna spokesperson said: “After 5 years of constructive work with HMT, we’re entering the home straight to make buy now pay later regulation a reality – a major win for UK consumers.
“We’re looking forward to working with the FCA on rules that protect consumers while keeping choice and innovation at the heart of the UK credit market.”
The FCA said in a published paper that users of buy now pay later products tended to be younger and less creditworthy while having higher levels of unsecured debt.
They were also almost twice as likely to be in “serious financial distress” than fellow Britons.
Nearly 2m adults have used buy now pay later products in the 12 months to May 2024, with 30 per cent of 25-34-year-olds using it in the year.
The global market is expected to top $560.1bn (£412.8bn) in 2025 with 13.7 per cent annual growth.
Hyder Jumabhoy, partner at international law firm White & Case LLP, said: “Alongside the rise in interest rates pushing up the cost of capital to providers, compliance with these changes is likely to increase operating costs and squeeze margins further for many BNPL providers.
“This will create pressure on BNPL firms to scale-up their compliance functions, but it could also drive a wave of consolidation in the market, especially among smaller providers.”
Fintechs have spearheaded the use of artificial intelligence, with Klarna chief executive Sebastian Siemiatkowski recently claiming it would lead to a recession and mass job losses.
“Unfortunately, I don’t see how we could avoid that, with what’s happening from a technology perspective,” Siemiatkowski said.
Siemiatkowski suggested that tech bosses had tended to dismiss the impacts AI could have on headcounts at firms, with Klarna cutting staff numbers from 5,500 to 3,000 in recent years.
Both Klarna and Zilch have also moved ahead with introducing physical cards with Visa.
Buy now pay later firms have struggled to keep a grip over the number of customers failing to meet payments.
Klarna’s consumer credit losses surged 17 per cent to $136m as net losses more than doubled to $99m.