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The UK government has launched a highly anticipated consultation to bring “buy now, pay later” lenders under the scrutiny of the Financial Conduct Authority and the Consumer Credit Act.
The new regulation would allow the finance watchdog to apply rules on affordability, meaning that BNPL providers including Klarna and Clearpay would have to check that shoppers were able to afford repayments before offering a loan.
“We promised to take action before the election and now we are delivering,” said Tulip Siddiq, economic secretary to the Treasury. “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 consultation on the new rules would be relatively short and close at the end of November “to reflect the urgent need for action to protect consumers”, said the Treasury.
BNPL loans have soared in popularity in recent years by offering consumers the ability to spread their payments in short-term instalments with no interest. However, the sector has remained unregulated, meaning providers do not have to run affordability checks on prospective users.
The Treasury said the change would force lenders to give “clear, simple and accessible information about loan agreements in advance so that shoppers can make fully informed decisions and understand the risks associated with late repayments”.
Regulating the sector would also give consumers the ability to raise complaints with the Financial Ombudsman and claim refunds from the lenders.
Consumer groups have warned that the current regime can lead people to accrue large debts from late repayment fees.
Research commissioned by the Centre for Financial Capability, a UK-based financial education charity, found that almost a quarter of BNPL loans were charged late repayment fees in the six months to December 2023.
Debt charity StepChange welcomed the move and said customers needed more protection.
“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,” said Richard Lane, the charity’s chief client officer.
Rocio Concha, director of policy and advocacy at consumer group Which?, said the government’s move was a “win” for consumers. The group’s research has found that many BNPL customers do not realise they are taking on debt or that missing payments can result in uncapped fees.
The UK government first said it would regulate interest-free BNPL loans in February 2021. The Treasury ran a consultation in early 2023 and announced plans to regulate the sector.
However, the previous Conservative government announced a delay in implementing draft legislation in July 2023, sparking criticism from the Labour party.
“Millions of people use ‘buy now, pay later’ to manage their finances, but the previous government’s dither and delay left them unprotected,” said Siddiq on Wednesday.
Michael Saadat, international head of public policy at BNPL lender Clearpay, said it was “encouraging” that the Treasury had listened to industry feedback and evolved the previous government’s regulation with a “proportionate approach”.
Klarna chief executive and co-founder Sebastian Siemiatkowski said the government had been working with the industry and consumer groups before coming into office. “We’re looking forward to carrying on that work to put proportionate rules in place that protect consumers while fostering growth.”
The government said it expected final legislation to be set out early next year and the new rules to be implemented in 2026.
