By Charlie Conchie
fees at the Financial Ombudsman Service may make it an unworkable solution for buy-now pay-later disputes, Charlie Conchie argues.
“Millions of people will be protected through strengthening regulation of interest-free Buy-Now Pay-Later (BNPL) credit agreements,” the Treasury proudly declared in June, as it rolled out a regulatory framework for the sector after a lengthy consultation process.
The catch, however, was that tailored rules likely won’t be introduced until 2024 – three years after former Financial Conduct Authority interim chief Chris Woolard warned of the need for “urgent” oversight of the deferred payment products.
And to add to the troubles of the Treasury, questions are already swirling over how fit for purpose the City’s watchdogs are to clampdown on a sector that is spooking debt campaigners and political figures alike.
The FCA has already irked BNPL firms by using its existing financial promotion powers to clip their wings, and the eyes of many providers are now looking elsewhere and picking holes in the framework proposed by the Treasury.
One of the headline measures, for example, was to give BNPL borrowers the power to take complaints to the City’s moderator-in-chief: the Financial Ombudsman Service (FOS). Behind closed doors, firms are railing against a fundamental mismatch at the heart of the proposal.
The average spend of shoppers using the BNPL product from market-leader Klarna comes in at £80. For Laybuy it’s £75 and ClearPay £65, while the average outstanding balance of users stands at £254, according to research from Barclays Bank and debt charity StepChange.
But the case fee for firms to escalate a query over those debts with the FOS? £750.
The chasm between the figures raises the potentially dangerous prospect that BNPL firms will simply cut out the middleman and settle the complaints directly with their customers.
“Because the case fee is so high, there is a strong incentive to just give the customer £50 rather than see this go all the way up the chain,” a senior BNPL executive tells City A.M. on condition of anonymity.
“This isn’t a bad outcome for the consumer, but it takes away a key element of the regulator’s duty, which is visibility of problems in the market, because the FOS doesn’t actually see any of the customers’ complaints.”
He adds that there is a risk that “bad practices can be kept in the shadows” as disputes are settled directly between firms and their customers.
The chief of BNPL firm Zilch, which is one of few firms to win approval from the Financial Conduct Authority, similarly tells City A.M. that while the FOS in theory provides a safety net, in practice it needs work.
“We haven’t had a single complaint as of yet, so we feel that our process works. But the thing we regretted is of course the cost of this process,” he tells City A.M. “For the smaller ticket items that needs to potentially be reviewed.”
Another BNPL boss says that “chasing down a £75 debt that cost you £750 makes no rational economic sense”, while fintech group COADEC raises the prospect of market breakdown as consumers exploit the lofty case fees.
“This means it would be cheaper to refund the customer whenever a complaint was threatened, regardless of who is at fault – this could cause chaos,” Luke Kosky, COADEC’s fintech policy tells City A.M..
The FOS for its part says bringing the firms into its remit is an important step and it will reach a “fair and reasonable decision” based on all the circumstances of a particular case.
On the subject of the costs, it claims it reviews its plans and budget and consults on costs annually including the case fee. The Treasury meanwhile told this paper it would hold BNPL firms to the “high standards we expect of other loans and forms of credit” and “foster the safe growth of this innovative market in the UK.”
But with just over a year from the expected rollout of rules, the financial hole between FOS fees and BNPL firms raises questions over its suitability and structure.
And with a few smaller consultations left to run before regulation is finalised, it faces a scramble to make the sums start to add up.
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