Klana set for regulation – but not until next year at the earliest
Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on the publication of the FCA’s business plan, which shows Klana set for regulation – but not until next year at the earliest.
The FCA has published its business plan for 2021/22. This includes new protection for borrowers through regulation of the buy-now-pay-later sector, ensuring those with debt problems are treated fairly, that debt advice is fair and effective, and that people know about alternatives to high cost credit: https://www.fca.org.uk/publications/business-plans/2021-22
- By October last year, 14% of people said they’d taken on more debt to get through the crisis, and another 16% said they expected to borrow more over the following six months.
- The buy-now-pay-later market more than trebled in size during 2020.
- In October 2020, 53% of people were financially vulnerable in some way, and 27% had low resilience.
Sarah Coles said:
“Many of us did whatever we had to do in order to get through the pandemic, and in some cases, this included taking on an awful lot of debt. The FCA is worried that if we’ve done any of this using unregulated buy-now-pay-later providers like Klana and Clearpay, we may not even realise we’ve borrowed money, and could face risks that we’re entirely unaware of. It’s also worried that people who have maxed out all their available borrowing could run into real trouble when the furlough scheme comes to an end, and that lenders and some debt advice companies risk making their problems even worse.
“The Woolard Review rang several alarm bells over buy-now-pay-later, including the fact people didn’t really think of it as borrowing, so didn’t give it the same kind of thought they would when taking on other types of debt. The very basic credit assessments associated with this kind of borrowing means they can take on a huge number of these arrangements, and run up significant debts, without considering whether they can afford them. One bank told the review that of the 677,000 of their current account customers who made a payment to two of the large providers in November 2020, 10% had also exceeded their overdraft limit in the same month.
“The FCA plans to consult on regulating this market in 2022, and while this is a welcome development, the timescales involved mean there’s a good chance that many more vulnerable borrowers will be put at risk in the interim. 5 million people had used this kind of borrowing between the outset of the pandemic and the Woolard Review just under a year later, and the size of the market trebled during 2020 alone. The sooner it starts regulating the sector, the better.
“It has also promised to keep a close eye on how borrowers are treated when they fall into financial difficulty – particularly vulnerable people – and examine the help they’re offered now that industry-wide coronavirus support has been phased out. If lenders fall short, they’ll be tackled individually, but it’s not ruling out setting new rules too.
“It will also be keeping an eye on debt advice companies, which consolidate debts and take fees from repayments. It expects demand for debt advice to double as a result of the pandemic, so it’s vital that vulnerable people aren’t getting ripped off. The FCA checked out the advice on offer from these companies and ‘found significant problems’ creating ‘risk of serious consumer harm.’ It plans to tackle firms individually and consider new rules.
“But don’t wait for the new rules to protect you, it’s worth taking steps to protect yourself too. Anyone in debt and seeking help should steer well clear of commercial firms making money in this area and go to debt charities like StepChange instead. They have no vested interest in selling you a specific solution, and charge no fees. They just want to find the best possible solution for you, rather than flogging a package that makes them juicy fees.”
Kindly shared by Hargreaves Lansdown
Main photo courtesy of Pixabay