Millions of consumers who use buy now, pay later (bnpl) services are to get better protections under new rules proposed by the government.
BNPL products allow shoppers to spread the cost of purchases over time, but the sector is unregulated and borrowers do not enjoy some of the legal protections provided by other consumer credit products. Critics say the products can lead to people taking too much debt and getting into financial difficulties.
Firms such as Klarna and Clearpay have seen demand surge by allowing customers to spread out the cost of purchases. Worldwide buy now, pay later (BNPL) transactions are predicted to increase by nearly $450bn (£345bn) by 2026. During the pandemic the alternative payment method is estimated to have grown almost 400 per cent.
Now the government is proposing to bring companies offering the services under the supervision of the Financial Conduct Authority (FCA) to ensure consumers receive clear information, avoid unaffordable borrowing and have strong rights when issues arise.
Economic Secretary to the Treasury Tulip Siddiq said: “Our approach will give shoppers access to the key protections provided by other forms of credit while providing the sector with the certainty it needs to innovate and grow.”
The new rules will allow the FCA to apply rules on affordability, meaning companies will be required to check that shoppers are able to afford repayments before offering a loan, to help prevent people building up unmanageable debt.
Companies will also need to provide clear, simple and accessible information about loan agreements in advance so shoppers can make fully informed decisions and understand the risks associated with late repayments.
Martin Lewis, consumer expert and founder of MoneySavingExpert.com, said it was a “travesty” BNPL was not never been regulated. “BNPL can be useful, allowing those who need to spread payments for a budgeted, necessary purchase like a plumber to do it interest-free. Yet it’s been sold as a lifestyle choice, not a debt, and pushed for instinct buys or even takeaways. Too many are in trouble with multiple BNPL repayments, leading to debt-chasing and credit file risks.
“Regulation will mean firms must be overt that it’s a debt, have proper affordability rules, and will crucially let people go to the ombudsman if things go wrong. Yet it’s not coming in until 2026, so people should still be very wary until then.”
Rocio Concha, of consumer group Which?, said: “Our research found that many BNPL customers do not realise they are taking on debt or consider the prospect of missing payments, which can result in uncapped fees, so clearer information about the risks involved as well as the use of affordability checks and options for redress would be a win for consumers.
“We are keen to see legislation quickly passed to ensure that BNPL users are protected as strongly as consumers using other credit products.”
Dame Clare Moriarty, chief executive of Citizens Advice, said: “We’ve long called for regulating the buy now pay later market and are glad to see the Government making this a priority.
“We know the difference this can make to so many people’s lives. Compared with two years ago, our advisers are helping more than twice as many people with a BNPL issue. Many are struggling to repay credit they can’t afford or falling behind on essential bills or needing emergency support, like food bank vouchers.
“Proper regulation can prevent this spiral. The Financial Conduct Authority must act swiftly to set rules that protect consumers from unaffordable borrowing once the necessary legislation is in place.”
Around a fifth (21%) of those who have approached Citizens Advice with a BNPL issue have also needed a food bank referral or other charitable support, the charity said.
Richard Lane, at StepChange Debt Charity, said: “BNPL can be a useful form of credit for those looking to manage chunky expenses but, as with every other form of credit, it needs to be bound by consistent rules that minimise consumer harm.
“We need to see BNPL providers introduce proper affordability checks and end aggressive marketing at checkout, which can lead to impulse decision-making and can cloud consumers’ judgment on affordability.
“As cost-of-living pressures continue to burden millions of households, consumers need more protection, not less. A properly regulated BNPL sector will go some way to facilitating that.”
The consultation will close on November 29. Final legislation is expected to be laid in Parliament in early 2025, with the rules taking effect in 2026.
