The UK financial watchdog has warned firms offering buy-now-pay-later (BNPL) products about using misleading advertising, including social media posts, and that they must comply with financial promotion rules.
Some adverts and posts by social media influencers seen by the Financial Conduct Authority have promoted the short-term credit without warning about the risks, such as taking on unaffordable levels of debt and the consequences of missed payments.
The FCA said it is “concerned” consumers could be misled by adverts on websites and social media, such as posing the benefits of BNPL without any fair and prominent warnings of the risk.
This includes being clear, fair and not misleading when offering these services.
“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,” said Sheldon Mills, executive director of consumers and competition at the FCA.
While the FCA does not currently regulate BNPL products, but is “proactively addressing concerns about potential harm.”
Some financial promotions offered by BNPL firms such as Klarna are unregulated, but failing to follow promotional rules could result in a criminal offence, the City regulator said.
"Hidden underbelly of debt"
Sarah Coles, senior personal finance analyst at investment platform Hargreaves Lansdown, said the warning highlighted how social media influencers flogging BNPL loans may be encouraging people to take on debts they don’t understand.
“At a time when rising prices have pushed so many people’s finances to the edge, piling up unaffordable levels of debt risks pushing them into the abyss,” she said.
"With so many people under intolerable financial pressure, there’s a risk that more of them hunt for any way to make ends meet. Buy Now Pay Later seems like a cost-free solution, but if people don’t understand what they’re getting into, they could rack up unaffordable debts and face serious consequences."
Laura Suter, head of personal finance at AJ Bell, said use of BNPL will "undoubtedly rise" in the next few months as more people turn to debt.
"Rising prices and wages failing to keep up means only two options for many – falling back on savings or taking on debt. With use expected to boom the regulator is attempting to crackdown on adverts and social media posts to make sure they lay bare all the risks involved."
While BNPL is seen as the friendly, less scary debt option for many who want to defer the cost of paying for things, partly thanks to the providers skills in product design, marketing and very small-print warnings, Suter said many people use it without fully understanding how it works and end up spending more than they otherwise would.
Suter also suggested a further worrying aspect for authorities was the unknown scale of this market in the UK.
“Since its launch, Buy Now Pay Later use has soared in the UK, and it’s become embedded in online shopping. You can buy everything from a £42,000 Bulgari watch to your weekly food shop at Iceland and defer the payment. But a worrying aspect is that there isn’t good data on the size of the market and debt taken out through Buy Now Pay Later isn’t counted in official debt figures from the Bank of England. This means there is a hidden underbelly of debt that UK people are taking on, but the scale of which is unknown.
“As the cost of living bites, more and more people will use Buy Now Pay Later. But they should remember the golden rules of using any debt: don’t take it on without a way to repay it, only use it if you’ve exhausted all other options and don’t use it to buy things you don’t need. They should also make sure they understand the implications if they miss a payment or aren’t able to repay the debt at all.”