Are Klarna and other BNPL Lenders the New Wonga?

Stella Creasy, the Labour MP who became a champion of the campaign against Payday Lenders, has now compared “Buy Now, Pay Later” (BNPL) credit providers with the high-cost lenders that exploded across the UK after the last financial crisis.

Klarna, Clearpay, Laybuy and Paypal she suggested could become the new Wonga’s of this crisis.

And alongside another 70 MPs, she has now tabled an amendment to the Financial Services Bill, that is passing through the UK Parliament, calling for them to be better regulated within three months of the Bill becoming law.

This would force the UK’s Financial Regulator, the Financial Conduct Authority (FCA) to accelerate its current plans to regulate this new market, which otherwise could take 18 months.

Any new regulations will be vital if UK Consumers are to be protected from what is currently a poorly regulated financial market and should take the form of limiting the number of agreements that are exempt under the Consumer Credit Act 1974.

Are there Similarities between Payday and Buy Now Pay Later Lenders?

Stella Creasy is correct there are similarities between Payday Lenders and Buy Now Pay Later firms, and many debt advisers have been warning if we don’t learn from the past, many UK Consumers will indeed have to pay later.

The first similarity is for many BNPL firms, the pandemic has been what the Credit Crunch was for the Payday Lending industry: an opportunity.

In the aftermath of the Credit Crunch, many traditional sources of lending were heavily restricted for consumers.  Many found banks were reluctant to lend and were reducing their overdrafts, whilst many credit card firms reduced the credit limits and even cancelled the cards of customers who had never missed a payment. Some creditors, on the other hand, just did not know who they had been lending to and what risks they had exposed themselves to. The Bank of England, also had most of them on a choker leash, having bailed them out at the expense of the UK public.

Similarly, even before this pandemic began many lenders had already began restricting access to their credit facilities, wary of an increasingly interventionist Regulator, the Financial Conduct Authority. They were warned about irresponsible lending, not carrying out proper creditworthiness checks and effectively farming many of their customers in persistent overdraft and credit card debt.

Many of their Payday lending competitors, have also now left the consumer credit market, many through liquidation, after collapsing under the weight of mis-selling claims and tougher regulation.

Other firms, like Amigo are currently praying for the FCA to give them a last-minute reprieve.

In addition to that, consumer credit borrowing from many traditional sources were already maxed out and coming to an end for many consumers as we came to an end of this consumer credit cycle which began in 2014/15. As with the last financial Crisis, they were weekly reports in the run up to this pandemic by the UK’s banks and financial regulator saying they were not concerned with levels of indebtedness. It was all very manageable.

Since then and the beginning of the pandemic, many lenders have now had to offer their customers payment breaks, because they cannot afford to make monthly payments.

Against such a backdrop, the lightly, to non-regulated, Buy Now Pay Later firms have arrived with their fun, lifestyle marketing campaigns, and easy to access credit facilities. It does not matter if you have a poor credit score, nor does it matter if you are already over committed, with light touch affordability checks and non-regulated agreements, you can buy now and pay later.

This is a classic case of financial markets moving faster than regulators and like with Payday Lenders, if we don’t act quickly, the damage will already be done to the finances of millions by the time we do.

The Rise of Buy Now Pay Later Lending

This is not scaremongering, as just over Christmas, UK consumers spent £2.3 billion using Buy Now Pay Later (BNPL) facilities, whilst since the pandemic, it is believed that consumer spending, using BNPL, increased by 35%.

The fact is the unregulated products that many of these firms are offering present a risk to consumers, even if the Lenders claim they don’t. Deals such as pay within 30 days or pay over 3 months are still debts if they cannot be paid: the fact they don’t charge interest and fees doesn’t remove the risk. The simple fact is for these products, the business model is to encourage people to buy (and, therefore borrow) more, so the BNPL Firms can charge the retailers a fee. The dangers of people becoming over indebted is, therefore, real.

Such deals are possible because they take advantage of UK Consumer Credit Law that exempt fixed sum loans from regulation providing payments are paid within 12 months and no interest or significant charges are applied to the debts.

Similar exemptions also apply for running credit agreements, which allow consumers to spend within certain credit limits, providing interest and charges are not applied, and the number of monthly payments are less than three.

However, contrary to popular belief not all credit agreements being offered by Buy Now Pay Later lenders, like Klarna, are unregulated. Some, where they do not meet the criteria for exemption, are governed by the Consumer Credit Act 1974, which means proper affordability checks should be carried out, and if they are not, those lenders could face the same mis-selling claims that pay day lenders did.  Another possible similarity in future?

FCA Must Regulate and not in 18 Months

The reality is it is now time for the Financial Conduct Authority to act and they should do so to reduce the number of agreements that are exempt under the Consumer Credit Act.

The number of agreements that qualify as exempt was expanded in 2015, to reduce the number of products the FCA had to regulate. This was understandable at the time, as they were taking over the regulation of 50,000 consumer credit firms.

However, that time has now passed, and as we have seen and will see, opportunistic, new consumer finance firms will always find new and innovative ways to get ahead of the Regulators.

They may claim they want regulation, but that is usually only if it is on their terms. However, if this financial crisis and the last one has taught us anything, it is like Coronavirus, if we are still talking about it, it’s probably already overdue.

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