Buy now, pay later companies like Klarna and Block's Afterpay could face tougher rules in the UK
Nicholas Koukoufilis | Noor Photo | Getty Images
The new UK Labour government will soon introduce updated plans to regulate the “buy now, pay later” industry, a government spokesman told CNBC.
A spokesman for the UK Treasury said the government would do so “soon”, echoing earlier comments made by Tulip Siddiq, the Treasury's new economy secretary, to parliament on Wednesday.
“Regulating buy now, pay later products is critical to protecting people and providing certainty to the industry,” a Treasury spokesperson told CNBC via email on Thursday.
Earlier this week, Friend, who was chosen as the UK's new City minister after Keir Starmer's Labour Party's landslide election victory, told lawmakers the new government “looks forward to working closely with all interested stakeholders and will set out its plans shortly”.
This follows multiple delays to the UK’s roadmap for mortgage lending legislation. The government first set out plans to regulate the sector in 2021. This follows a review by former FCA chief Christopher Woolard, which found that more than one in 10 mortgage customers were in arrears.
BNPL plans are flexible credit arrangements that allow a consumer to purchase an item and then pay off their debt at a later date. Most plans charge customers a third of the purchase value upfront, then take the remaining payments over the next two months.
Most BNPL companies make money by charging their merchant partners a fee per transaction, rather than interest or late payment fees. Some BNPL companies charge fees for non-payment, but the model is not widely standardized.
This disparity in services across non-income mortgage providers is one reason activists have called for regulation. But the main reason is that people—especially younger consumers—are increasingly racking up debt from these plans, sometimes from multiple providers, that they can’t afford.
Gerald Chappell, chief executive of online lender Abound, which uses consumer bank account information to inform credit decisions, said he had seen data processed through his company’s platform showing customers had raised “thousands of pounds” from as many as three or four BNPL providers.
Although subprime mortgages can be considered a credit “innovation,” Chappell says, “I feel in part that these loans were a product of the zero-interest-rate environment. Now that we’re in a high-interest-rate environment, is that still sustainable?”
“The economy has gotten weaker, credit default rates have gone up. There’s been an accelerated adoption of buy-now-pay-later policies, which also increases debt burdens. So I think a lot of these companies are suffering and will continue to suffer.”
Chappell said he would not be surprised if the Financial Conduct Authority, the UK's financial regulator, were able to regulate the non-income mortgage industry within the next 24 months.
Multiple BNPL Rule Delays
Executives from two major mortgage lenders, Klarna and Block, have rejected the proposed measures, saying they risk pushing people toward more expensive credit options like credit cards and auto financing plans.
A spokesperson for Clearpay, the UK arm of Afterpay, said the company welcomes the government’s update that it plans to announce BNPL regulation soon. Afterpay is the BNPL arm of Jack Dorsey’s fintech company roadblock.
“We have always called for fit-for-purpose regulation of the sector that prioritizes customer protection and provides much-needed innovation in consumer credit,” a Clearpay spokesperson told CNBC via email.
“Clearpay already has safeguards in place to protect consumers, but we recognise that not every provider takes the same approach. That’s why we continue to advocate for proportionate and appropriate regulation that sets high standards for the industry across the board,” a Clearpay spokesperson added.
Spokespeople for rival BNPL companies Klarna, PayPalZilch and Bezos could not immediately be reached for comment when contacted by CNBC on Thursday.
BNPL loans are a largely unregulated part of the financial services ecosystem, not just in the UK but globally. In the US, the Consumer Financial Protection Bureau has said that customers of BNPL companies should have the same protections as credit card users.
The regulator unveiled an “interpretative rule” for the industry, which means that BNPL lenders, such as Klarna, Affirm, and PayPal, must offer refunds for returned products or cancelled services, must investigate merchant disputes and stop payments during those investigations, and must provide invoices with fee disclosures.
