‘Buy now pay later’ lenders brace for new regime

“Out of debt, out of danger,” as the proverb runs. But how to spot danger when the debt is in disguise? One of the unnerving findings of the Woolard Review into the unsecured consumer credit market, published by the Financial Conduct Authority on Tuesday, was that some customers taking out furiously popular “buy now pay later” offers do not view them as credit at all. 

Instead, some regard BNPL options — which typically allow customers to pay for an item in a few instalments, or one deferred sum — as an alternative payment technology, according to the FCA’s research. For certain retailers, BNPL was “indistinguishable” from other payment methods. The UK regulator estimates 5m people have used this option to buy on credit during the pandemic. But some of the key providers — such as Klarna and Clearpay — currently fall outside of the scope of FCA regulation.

The watchdog is now working with the Treasury to draw up new legislation that will bring them in, following an urgent recommendation in the report drawn up by former FCA interim chief executive Christopher Woolard.

Policymakers could demand tougher credit checks — the government has highlighted the problem that a “lack of visibility” around BNPL debts creates for other lenders — and changes in consumer messaging. 

Retailers highlight the ease of the system. But debt is debt. Sweden’s Klarna stresses its customer default rate is less than 1 per cent, but it will in certain cases pass outstanding debts to a collection agency, as will some peers. Klarna does not charge late payment fees, but Australia-owned Clearpay and some other providers do. 

These debts may be small in pound terms but can add up. The FCA notes BNPL is spreading into more expensive homeware and electrical purchases, and that one customer can have multiple such credit agreements at once.

One big bank told the regulator that, out of its customers that had made a payment to two major BNPL providers in November, a tenth exceeded their overdraft allowance in the same month. 

Campaigning MPs have called the industry “the next Wonga” — a reference to what was once the UK’s largest payday lender. The sector was hit with swingeing cost caps six years ago, pushing more than 1,000 providers out of business; Wonga fell into administration in 2018. 

The parallels may prove more cautionary than instructive. BNPL providers have been quick to welcome the prospect of a new regulatory regime, while maintaining that customers should not be stopped from accessing flexible payment options that provide an alternative to long-term debts. To strengthen that argument, they should work with retailers to make the credit relationship crystal clear.

Capco: Garden State

Covent Garden is a monument to market forces, writes Bryce Elder.

For more than 200 years it was London’s most animated red-light district, dense with brothels and gambling dens. The area became respectable only gradually through the 1800s as its fruit and veg market grew, pushing illicit trades into nearby Soho.

Market forces have taken effect much more rapidly at Capital & Counties, Covent Garden’s biggest landlord. Its estimated rental values slumped 22 per cent last year as the estate endured its quietest spell in approximately five centuries. Annual rent collection totalled 60 per cent, with a further 36 per cent of tenants given alternative arrangements such as turnover-linked rents, the company reported on Tuesday.

A brutal showing ought to be no surprise given retail, leisure and hospitality make up three-quarters of Capco’s portfolio. An estimated 40 per cent of Capco rents rely on spending by international tourists, whose return looks some time off. Preserving Covent Garden’s post-pandemic status will therefore be costly, irrespective of whether the government extends its moratorium on rental foreclosures beyond March.

Yet Capco can afford to be patient. Its core loan covenant allows for a further 68 per cent value decline and lenders have agreed to skip this year’s interest cover tests. Liquidity looks healthy following a debt refinancing in November that put its 26 per cent stake in higher-valued neighbour Shaftesbury to work as loan collateral. Short-term trading is tough but bearable, so reduced long-term valuations must assume that Covent Garden regresses by at least a few decades, which seems pessimistic.

Property valuer CBRE sees the world in a much colder light, however. Up to another year of reduced takings and a higher discount rate on future income combined to cut its year-end 2020 valuation of Capco’s portfolio by 27 per cent to £1.8bn. That put Capco on a net asset value of around 208p per share — down from a peak of 334p in June 2018 and well below market expectations.

Yet with the shares sliding on Tuesday to about 130p, Capco has started to look like an obvious target for any specialist funds and overseas predators that can take a view beyond the short term. It is offering a big discount for a whole lot of history.

FCA: ian.smith@ft.com
Capco: bryce.elder@ft.com