Jun 21, 20221 min read

Regulation will take time, but protecting consumers doesn’t have to.

by Alex Marsh

It’s been a big week in the UK for consumer credit regulation nerds (like me), with two announcements from HM Treasury (HMT) promising to better protect consumers whilst fostering innovation and competition. The first was the surprise news that long overdue reform of the Consumer Credit Act (dating back nearly 50 years) will finally become a reality, shortly followed by the much anticipated HMT consultation response on BNPL regulation yesterday. Let’s start with the latest BNPL news…

HMT have concluded that BNPL products are inherently lower risk than interest-bearing credit products and can be a useful way for consumers to manage their finances when used appropriately. We agree: the average UK household owes more than £2,100 on their credit card; the average outstanding balance on Klarna  is £48 – much closer to the typical monthly cost for subscriptions or a mobile phone bill.

So let’s look into what this will mean for consumers in more detail. 

BNPL regulation can’t come soon enough 

It is nearly 18 months since Chris Woolard, former CEO of the Financial Conduct Authority (FCA), declared an ‘urgent need’ for regulation of the Buy Now Pay Later (BNPL) sector.  

In that time, the number of providers offering – or claiming to offer – BNPL has also ballooned. By one estimate there are now 19 BNPL services operating in the UK and even traditional banks like Barclays, charges 10.9% interest for their ‘BNPL’ instalment offering

HMT plans to take a proportionate and risk-based approach to future BNPL regulation which balances appropriate consumer protections without unduly limiting their availability or stifling innovation in the sector. 

Under this approach consumers will benefit from the same regulatory protections as when using a credit card, regardless of which BNPL provider they use. This includes: 

  • Section 75 refund rights and the right to escalate complaints to the Financial Ombudsman Service (FOS). 
  • Marketing and promotions by BNPL providers will now be subject to oversight from the FCA’s Financial Promotions regime
  • BNPL providers will need to assess a consumer’s ability to repay before they commit to a purchase. Today, Klarna is one of the few providers that already undertake such checks so new rules here will ensure consistency across the sector and high standards of responsible lending. 

These additional protections are good news for UK consumers and will raise the standards of the whole BNPL sector to be in line with how Klarna operates.

Klarna has not waited for regulation

Klarna has many years’ experience offering regulated credit and we took Chris Woolard’s advice back in February 2020 to ‘not wait for regulation’ very much to heart.  We have made considerable changes to our BNPL products to support consumers over the past 18 months, including:

  • Strengthened consumer communications making it absolutely clear when we offer credit products; 
  • Worked with Fairer Finance to ensure our Terms & Conditions are clear, simple and easy to understand; 
  • Improved real-time credit decisions and affordability checks by providing consumers with the option to share their bank details using Klarna’s world-leading open banking network; 
  • Introduced a Klarna Complaints Adjudicator as an interim step until the jurisdiction of the FOS is extended to include BNPL products – given the timelines outlined by HMT, we have requested again that our BNPL products come under their jurisdiction on a voluntary basis.  
  • Started sharing BNPL purchase data with credit reference agencies, helping consumers build up a positive credit profile and protecting them from accumulating multiple lines of credit by reporting use of our BNPL products and missed payments with UK credit reference agencies. 

We built our business to solve problems for consumers and we think our model of making a new decision on every transaction, no interest, and clear, structured repayments, lead to much better outcomes for consumers. Our default rate is 30% – 40% lower than credit cards and our Trustpilot score are 4.4 out of 5 from over 150,000 reviews. Most traditional banks have scores well below 2 out of 5 (Barclaycard, Lloyds, HSBC).

Protections are needed sooner

While regulation is complex, we urge the Government to move quicker than planned to implement regulation which gives additional protections to consumers from both irresponsible, unregulated BNPL providers and traditional banks disguising high interest products as ‘BNPL’. 

These protections are crucial as consumers are already facing an unprecedented rise in the cost of living which will likely get worse before it gets better. While credit does not give consumers more money, responsible credit used well, can help consumers make their money go further. Buying a jumbo pack of 72 nappies works out at 19.4p per nappy, but if you only have the cash to buy a smaller pack, you’ll pay a third more. With Klarna’s interest and fee-free products, you can split the cost of bulk purchases over the time you are using the items, saving money and time because you need to go to the shops less often. 

Eighteen months ago Chris Woolard noted that consumers need better alternatives to expensive, high-risk forms of credit – as prices continue to rise, more consumers will be tempted to use high-cost credit cards and overdrafts to ease the squeeze. Lets not forget that interest rates are at a 23-year high of over 20% as the old banks revert to their usual tricks of hiking interest rates at the first sign of trouble.

Broader credit industry reforms

In the rush to protect BNPL consumers, it is important not to lose sight of the need for wider credit industry reform. The Consumer Credit Act (CCA) was designed when flares were fashionable (for the first time) and Kate Bush  topped the charts (for the first time). It offers a veneer of protection through endless prescriptive requirements but does little to genuinely drive good consumer outcomes in today’s digital world. That’s why HMT’s announcement last week that they will review the CCA is fantastic news for UK consumers. This will take time but  the Government has an opportunity to use upcoming BNPL regulation as a stepping stone to help shape and speed up  CCA reform.

In parallel, we must keep up the pace of reforms to other sectors that consumers of credit  products rely on, such as the credit information market where the FCA is currently conducting a market review. For examples of reform, the UK should look at some of the approaches taken by markets in Europe where debt registers are mandating all credit providers to share consumer credit data to a central database. Recent reforms in Norway have shown a reduction in consumer indebtedness by 8% in a single year. In the Netherlands, the register even  includes non-financial credit, such as your phone bill, so lenders can see consumers’ commitments  all in one place.

From our side, as the UK’s largest BNPL provider, we will continue working closely with HMT and the FCA to look at further ways to raise standards in the BNPL and wider credit sector to help accelerate progress and develop future regulation of the highest possible standard globally.

Alex Marsh, Head of Klarna UK