Klarna and Zilch have sounded the alarm over the scope of planned buy-now pay-later (BNPL) rules today as ministers close a key consultation before bringing the sector into regulation later this year.
The government has been sounding out the industry for its input on proposed rules after first laying out plans to clampdown on firms like Klarna, Clearpay and Laybuy last year.
Among the measures set to come into force are firmer credit checks on borrowers and expanding the remit of the City’s complaints watchdog, the Financial Ombudsman Service, to allow shoppers to dispute claims.
However, BNPL firms Klarna and Zilch said today that while they backed the moves from government to regulate the sector, some sections of the planned rules lean on outdated legislation and consumers can still bypass borrowing restrictions with dangerous loopholes.
“We are concerned with the suggestion to copy and paste Consumer Credit Act rules on credit agreements, which are outdated and don’t protect or inform consumers,” a Klarna spokesperson told City A.M. today.
“Quite the opposite, they leave consumers confused and, ironically, push them towards expensive and higher-risk forms of credit.”
Certain sections of the Consumer Credit Act, which was drawn up in 1974, have been disapplied from the planned BNPL rules while others will be dropped onto the proposed changes to credit agreements between BNPL firms and borrowers, raising concerns over whether they are fit for purpose.
Ministers have committed to a wider revamp of the Consumer Credit Act but Klarna said today the BNPL rules had given ministers a “golden opportunity to be bold and create new rules to give consumers the right information”.
Philip Belamant, the boss of FCA-regulated BNPL firm Zilch, also told City A.M. that the planned rules did not close out a potential dangerous “loan stacking” loophole where firms could borrow to pay off BNPL debts.
“This is where customers are allowed to pay off BNPL debts (or any debt, for that matter) with another credit card,” Belamant said. “All this does is shift the debt around, often moving it to a card carrying a significantly higher interest rate than an interest-free BNPL agreement.”
The complaints from Klarna and Zilch will form some of the Treasury’s workload over the coming weeks as it chews over the feedback from industry on its planned rules.
Ministers are aiming to lay secondary legislation for the sector by midway through this year before the FCA is then able to consult on a framework for firmer regulation. The timelines of the next steps could mean that rules for the sector do not come into force until 2024.
The Treasury did not respond to a request for comment.