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Lenders that specialise in “buy now, pay later” services will have to abide by similar rules to mainstream banks under long-awaited legislation that will result in them being fully regulated by the Financial Conduct Authority.
The UK government will on Monday bring forward legislation, more than four years after the previous Conservative administration announced plans to regulate the sector.
Under the rules, lenders such as Klarna and Clearpay will be required to check shoppers’ affordability before offering loans, while borrowers will be able to make complaints to the Financial Ombudsman.
“These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow and create jobs,” said Emma Reynolds, economic secretary to the Treasury.
“Buy now, pay later has transformed shopping for millions, but for too long has operated as a wild west — leaving consumers exposed.”
The Treasury said it would also reform the Consumer Credit Act in order to create a “modern, pro-growth framework that reflects how people borrow today”. The financial technology industry has long complained that the 51-year-old regime and some of its disclosure requirements are not fit for purpose in the digital age.
The market for “buy now, pay later” loans — known as BNPL — has boomed in recent years, allowing consumers to spread their payments in short-term instalments with no interest. More than 10mn people use the product in the UK, according to the Treasury.
However, the sector has remained unregulated, with providers not at present required to run affordability checks on prospective users. Consumer groups have warned that borrowers risk accruing unmanageable levels of debt under the current regime.
Some of the largest providers of BNPL — including Klarna — are already conducting external credit checks. But the new requirements expected from the financial watchdog in the next year will potentially be more stringent.
“Firms will need to check income levels, essential spending and other financial commitments rather than looking at missed payments and surface level risk,” said Liam Evans, managing director at PwC.
Doing this in real time with data-sharing technology is likely to raise costs for BNPL providers who are used to only paying to access customer data from banks when acquiring new customers, said Evans.
“Affordability checks would lead to slow customer acquisition, higher rejection rates, and more conservative risk appetite,” he said.
Lisa Webb, of consumer group Which?, said it was good that ministers were finally regulating the sector, but said the government “also needs to ensure this includes greater marketing transparency and information about the risks of missed payments and credit checks”.
A major win for the sector is the fact that BNPL lenders will get a bespoke regime on “disclosure requirements” rather than the old requirements set out in the Consumer Credit Act. This follows intense lobbying from the sector which argued that understanding digital payment flows and online shopping behaviour would help companies design sensible ways of explaining credit risk to customers.
They also worried that adding friction would lead customers to abandon their online shopping carts before completing purchases.
Research commissioned by the Centre for Financial Capability, a UK-based financial education charity, found that almost a quarter of such loans were charged late repayment fees in the six months to December 2023.
Klarna said: “Interest-free BNPL is an important alternative to high-cost credit for millions of Brits and we’ve supported regulation to keep it safe and accessible since 2020.”
It added that it was “good to see progress on regulation, and we look forward to working with the FCA on rules to protect consumers and encourage innovation”.
The UK announced plans to regulate the sector in 2021 and the Treasury consulted on the idea in 2023 but later delayed the implementation of draft legislation.
