More than 70 cross-party MPs are calling for regulation of buy now, pay later firms such as Klarna and Clearpay, which they say could be “the next Wonga waiting to happen.”
The group is planning to table an amendment to the financial services bill on Wednesday that would force the Treasury to introduce regulations within three months of the bill being passed. MPs hope the accelerated timeline will prevent some consumers from falling into debt.
Companies including Clearpay, Laybuy and industry leader Klarna have taken online shopping by storm, allowing customers to stagger payments for products such as clothes and furniture with no interest or fees – unless they fail to pay back on time.
The model has proved popular among millennials and Gen Z shoppers and their use has grown during lockdown. Shoppers are using the schemes 35% more often than before the pandemic, according to Comparethemarket.com, while 27% said they were turning to the service because they could not afford the purchase outright.
Labour MP Stella Creasy, who is leading the call, said: “This is the next Wonga waiting to happen,” referring to the controversial payday lender that went bust after a surge in affordability complaints in 2018.
“Many people have [financially] overcommitted themselves using buy now, pay later companies, and we are facing mass redundancies, furloughing, and drops in income. So even if you think you could afford it now, you might not be able to later,” Creasy said.
The Financial Conduct Authority is conducting a review into buy now, pay later firms, but MPs worry the lengthy process could push regulation out by another 18 months and leave consumers without protection during the Covid crisis and one of the worst economic downturns on record.
“The lesson from Wonga is the longer we take to act, the more people get into unaffordable debt. It’s not by accident that these companies make money from people sending more than they can afford,” Creasy said.
Financial campaigner Martin Lewis has also criticised the industry, saying he fears the schemes and their marketing tactics are harming the finances of young people. “Buy now, pay later shouldn’t be sold as a lifestyle choice, something cool, or a new high-tech way to pay. It should be seen for what it is – a debt,” he said.
In December, the UK’s advertising watchdog banned an Instagram influencer campaign by Klarna, saying it had “irresponsibly” encouraged customers to use the buy now, pay later service to cheer themselves up during the Covid pandemic.
Laybuy’s managing director, Gary Rohloff, said he was broadly in favour of regulation but said it was a “complete misrepresentation” to draw similarities with the payday lending industry. He said customers typically borrow around £65, which is paid back over six weekly and interest-free instalments. It also conducts credit checks to ensure customers can afford to pay in the first place.
“If the government decides to regulate, then we feel the high standards we already maintain place us in a good position,” he said.
Klarna, which was recently valued at more than $10bn (£7.3bn), did not comment on the amendment, but a spokesperson said the firm generally welcomed regulation.