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.

Regulated retailers?

Retailers are treated as:

  1. Lenders, if they offer “buy now, pay later”, and the customer pays the retailer; or
  2. Credit brokers, if they offer “buy now, pay later”, a third-party pays the retailer, and the customer pays the third-party instead.

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:

  1. lend; or
  2. act as a credit broker; or
  3. agree to do either or both of these things.

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:

  1. a fixed amount, and the customer pays for what has been purchased in no more than 12 instalments, over a period of no more than 12 months, where the credit is provided without interest or other charges; or
  2. a variable amount, and the customer is expected to make one payment for every specified period, where the period is three months or less, and the credit is free of interest and other significant charges.

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:

  1. more retailers will need to be authorised, or an AR;
  2. it will be unlawful to sell goods and services on the assumption that the customer wants to buy now and pay later – an increasingly common arrangement that forces customers to untick a box, or take another pro-active step, if they want to pay now instead;
  3. retailers will have to do affordability checks on their customers, before allowing them to buy now, and pay later;
  4. penalties and charges will be capped, to stop vulnerable customers getting into difficulty if they don’t pay, or they pay too late; and
  5. it will get harder, take longer, and cost more to take legal action against customers who do not pay.  

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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