FCA: Buy-now-pay later risks mushroom in the shadow of the pandemic

KONSKIE, POLAND - December 21, 2019: Klarna Bank AB logo displayed on mobile phone

Christopher Woolard has published his review of the sector for the FCA: https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf

Sarah Coles, personal finance analyst, Hargreaves Lansdown:

“Buy-now-pay-later has mushroomed in the shadow of the pandemic, and millions more people have taken on these debts. The runaway growth of the sector means there’s a real risk in billions of pounds being borrowed from an industry beyond the reach of regulation.

The health crisis could have been designed to push people into the arms of buy-now-pay-later firms. Millions of people are living on less, and looking for ways to spread their money further. Meanwhile, many of them have been stuck at home, where the temptation to go online shopping has been overwhelming. Online, they’ve seen more and more retailers offering buy-now-pay-later as an option, and in some cases it can even seem like the default way to pay.

The fact this borrowing is interest-free makes it feel safer, but there are inherent dangers. Fewer checks on borrowers mean a bigger risk people are taking on debts they won’t be able to manage. One bank told the FCA that one in ten of its customers who use these products are already in arrears. If shoppers can’t afford to make payments, they may have to make late payment fees, and will start carrying arrears.

Buy-now-pay later encourages people to focus on the cost of the first instalment, so it means they’re more likely to buy things they don’t need and can’t afford. The more deals they take out, the bigger the burden of instalments, and with all the uncertainty of the pandemic, there’s always the chance their circumstances could change and push these payments out of reach.

For regulated borrowing, during the pandemic, the FCA has been able to introduce payment holidays and guidance on the kinds of things lenders should do for those who are struggling. Because buy-now-pay-later operates beyond their scope, borrowers are utterly reliant on these companies independently deciding to do the right thing. If they don’t, lack of regulation means there’s no Ombudsman to step in and protect them from being hounded or treated unfairly by lenders.”

Payment holidays:

“The FCA’s COVID payment holidays helped protect almost one in five borrowers from the impact of the pandemic. The report revealed that credit reference agencies hadn’t been able to quickly agree how to manage missed payments, so the FCA stepped in with blanket rules. Now so many people have used all the available holidays, the report has called for a more coherent and coordinated approach to providing them with the tailored help they need to get through the crisis.

The report also highlighted that the industry needs to get to grips with the fact millions of borrowers took a break, and it’s not reported on their credit record. It’s vital the industry doesn’t punish people for taking sensible steps during the crisis to stay on top of their finances. However, at the same time, it needs to ensure that missing this information off a report doesn’t hide where people are in dire financial difficulties. One option is a ‘neutral’ marker on credit files to show that people have had help. However, if the industry settles on this solution, we can’t allow this ‘neutral’ marker to be used to rule millions of people out of sensible borrowing in future.”

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