Earlier this month it was announced that the Financial Conduct Authority would be undertaking an enquiry into the “deferred payments market” dominated currently by Klarna. For many fashion businesses Klarna is the deferred payment provider of choice – the consumer goes to checkout and has to opt in to paying other than by Klarna. But given sales can depend on how easy it is to pay, offering “buy now, pay later” helps, especially if the customer is young and fashion conscious.
“Buy now, pay later” has been around for some time. So the law should be clear and simple by now. But it isn’t. It sometimes has surprising results. And it is likely to get more complicated in the near future.
Retailers are treated as:
Lenders and credit brokers usually have to be authorised by the Financial Conduct Authority (“FCA”), or be an appointed representative (“AR”) of an authorised firm, before they:
If they are not authorised or an AR, they will commit an offence every time they lend, or act as credit broker, or agree to do so.
The good news for fashion businesses is that these offences are not prosecuted very often. But when they are, the retailer can be fined and wound-up; and its directors and officers can be fined and imprisoned. As if that was not enough, if the offence is committed, the “buy now, pay later” agreement that follows is usually unenforceable against the customer, whether the offence is prosecuted or not. And the customer might be entitled to compensation. Oh – and there will also be reputational damage to the brand!
The exceptions under the current law
At the moment, retailers that offer “buy now, pay later” do not need to be authorised or an AR if the “buy now, pay later” option is for:
The near future
There are good reasons for supposing the law will change in late 2021 or early 2022. If it does, we anticipate that:
If we are right, the administrative burden on retailers will increase; and some “buy now, pay later” providers will go out of business. Unsurprisingly fashion businesses might therefore prefer to stick to “buy now, pay now” with cash, a debit card, or a credit card, and nothing else – and avoid the regulation.
Mardi MacGregor is a financial services senior associate and Chris Finney is a financial services partner and members of the Financial Services Regulatory team at Fox Williams.
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