U.K.’s FCA Plans to Regulate Buy-Now Pay-Later Products

The U.K. Financial Conduct Authority will start regulating the interest-free buy-now pay-later sector, bringing government oversight to a growing area of consumer credit.

This type of unsecured lending has boomed as online shopping soared, with 5 million people using such products since the beginning of the pandemic, according to an FCA statement Tuesday. Their use nearly quadrupled in 2020 to reach 2.7 billion pounds ($3.7 billion), with providers like Klarna AB among Europe’s most valuable startups.

“Changes are urgently needed,” said former interim FCA head Christopher Woolard, who led a review of the sector. “New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty,” he said in the statement.

Woolard’s report also encouraged forbearance on consumers struggling to repay loans and recommended the availability of free debt-advice services.

A Klarna spokesperson said the company “wholeheartedly supports the regulation of the buy-now pay-later sector in the U.K.,” adding it agrees that regulation should be modernized to protect consumers. Klarna, which works with retailers including Hennes & Mauritz AB and Adidas AG, said it already assesses eligibility on every transaction and consumers who miss payments are restricted from using the service.

Separately, the U.K. Treasury said providers will need to undertake affordability checks and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.

“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,” John Glen, economic secretary to the Treasury, said in the statement.

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