UK to regulate businesses such as Klarna and Clearpay for later purchase (BNPL)

LONDON – Popular ‘buy now, pay later’ shopping services like Klarna will have tighter regulation, according to proposals announced by the British government on Tuesday.

The Treasury has said buy now, pay later (BNPL) businesses will come under the supervision of the Financial Conduct Authority (FCA), which regulates financial services companies and markets in Britain.

Such businesses would be expected to do affordability checks before being lent to customers, the government said, while people would also be allowed to raise complaints with the British ombudsman.

BNPL products are used as an alternative to credit cards and exploded in popularity during the coronavirus pandemic as people turned to online shopping due to closure restrictions.

These services, popularized by Swedish start-up Klarna, allow customers to spread the cost of their purchases over an interest-free installment period. Other companies in the space include Australian Afterpay, which operates the Clearpay brand in the UK, and Laybuy.

Consumer groups have warned that some people – especially younger people – could be lured into debt. The consumer and product rating company Which? in the UK, for example, it says that BNPL products can encourage people to spend more than they can afford.

A review by the FCA’s Christopher Woolard found that the UK BNPL market was worth £ 2.7 billion ($ 3.7 billion), while 5 million Britons had used such products since the start of the pandemic. Meanwhile, more than one in ten customers of a large bank using BNPL services were in arrears.

“Buy-now-pay-later can be a useful way to manage your finances, but it is important that consumers are protected as these agreements become more popular,” Treasury Secretary John Glen said in a statement on Tuesday. said.

“By intervening and regulating, we ensure that people are treated fairly and only offered agreements that they can afford – the same protection you would expect with other loans.”

Some lawmakers in the opposition Labor Party have criticized the government for what they call a U-turn on BNPL control. Labour’s Stella Creasy led calls for regulation of the BNPL, but the government only approved a proposal to do so three weeks ago.

Klarna, which has raised a total of $ 2.1 billion in funding so far, said it welcomed the move to regulation.

” As a bank with a full license, Klarna is very comfortable operating in a regulated environment and she wholeheartedly supports the regulation of the buying sector now paid later in the UK, ” said a spokesman for Klarna told CNBC.

“We agree that regulation has not kept pace with new products and changes in consumer behavior, and it is now essential that regulation is modern, proportionate and purposeful, reflecting the digital nature of transactions and the changing consumer preferences.”

Klarna is one of many technology companies expected to debut its shares in the public markets over the next few years. The company was last privately valued at $ 10.6 billion. Meanwhile, since the end of March, Afterpay has seen its shares rise more than 1,500% and is currently worth 41.8 billion Australian dollars (31.8 billion dollars).

“Clearly this is going to be a huge consumer experience, and I would say a little guidance from the regulator is welcome,” Francesco Simoneschi, co-founder and CEO of British finech firm Truelayer, told CNBC on Tuesday.

“I hope it will be open not to create ‘red tape’ for innovation and really focus on the point of risk.”