The city watchdog has informed buy now, pay later firms such as Klarna and Clearpay that it has seen online ads and posts by social media influencers that break rules by not warning of risks such as taking on unaffordable debt.
The Financial Conduct Authority (FCA) has written to companies in the multibillion-pound buy now, pay later (BNPL) sector promising to take action over unfair and misleading promotions, with more consumers looking into using such services as the cost of living soars.
BNPL services soared in popularity during the coronavirus pandemic, and allow 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 is particularly popular with millennials and generation Z shoppers, who can delay payments for goods at hundreds of retailers.
“As we face a cost of living crisis, consumers are having to make difficult decisions about their finances and how they pay for goods and services,” said Sheldon Mills, the executive director of consumers and competition at the FCA.
“Firms need to ensure consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions. It is vital that adverts are clear, fair and not misleading.”
The FCA, which recently held a round table with BNPL providers to discuss forthcoming regulation and called on firms to do more to support borrowers in financial difficulty, said it has seen promotions for products “without fair and prominent warnings of any risks to customers”.
The FCA pointed to risks such as taking on debt that customers then cannot afford to pay, the consequences of missed payments and “any other adverse consequences such as the impact on the customer’s credit file”.
In the letter to BNPL providers the FCA said it would continue to monitor compliance and look to take action if ads continued to break rules.
“For example, we use a wide range of enforcement powers, criminal, civil and regulatory, such as withdrawing permissions and issuing fines,” the FCA said. “[And we] can direct a firm to withdraw an advert (or its approval of an advert), or prevent it from being used in the first place.”
Klarna, by far the most popular service, with more than 18 million UK customers, said it is not the culprit behind the ads that have prompted the FCA warnings.
“Our advertising promotes responsible spending and our financial promotions already comply with the FCA rules,” a spokesperson for Klarna said. “As a regulated bank, our communication is transparent, making it clear we offer credit, and the consequences of missed payments so consumers can make informed choices.”
The company said it shared the FCA’s concerns “because not all BNPL providers operate to the same high standards as Klarna”.
It said: “We continue to call for proportionate regulation of the sector so consumers are protected regardless of the provider they choose.”