The Government has revealed long-awaited plans to regulate "buy-now pay-later" firms, but the new rules won't come into effect for several months.
Buy-now pay-later (BNPL) companies such as Klarna, Clearpay, Laybuy and Openpay allow consumers to pay for goods in instalments. The BNPL firm pays the retailer for you and you then agree to pay the BNPL firm back over a few weeks or months, meaning you can spread your shopping costs. It's usually interest and fee-free but late fees are charged if you miss a repayment.
But while BNPL has surged in popularity, particularly among young people, the lenders remain largely unregulated, raising concerns about people falling into debt. Britain's buy-now pay-later sector nearly quadrupled in size during the pandemic in 2020 to £2.7bn.
The Government first promised to regulate the sector in 2021, and has been "painfully slow" in bringing legislation forward, according to consumer champion Martin Lewis. Last February, the Financial Conduct Authority (FCA) told the four biggest buy-now pay-later operators to change their contracts after identifying potential harm to customers. Currently, customers who are not happy with any of the BNPL companies have to use consumer rights law, which is not overseen by the FCA.
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The consultation has been a long time coming, said Matthew Upton, director of policy at Citizens Advice. "Buy-now pay-later borrowing can be like quicksand - easy to slip into and very difficult to get out of," he said. "Action is needed quickly. Every day without regulation is another day people are left unprotected."
Under the new plans, the FCA would be given powers to clamp down on firms who break the rules, including banning them from further lending. Firms would also have to be licensed by the FCA and would face tougher rules when advertising their products. The Treasury said the new rules would protect up to 10 million people from being "exposed to financial harm".
The draft laws are subject to consultation and Parliamentary approval. The plans have been published by the Treasury with an April 11 deadline for submissions and are expected to become law before the end of 2023. Once they come into effect, the new rules will mean that:
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Lenders will need to ensure BNPL advertising is clear, fair and not misleading. BNPL firms will have to follow existing advertising rules on financial promotions, making it clear that BNPL is a form of credit.
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Customers will get Section 75 protection on purchases over £100 made using BNPL. This means the BNPL provider will be jointly liable with the retailer if anything goes wrong.
Customers will have the right to complain to the Financial Ombudsman Service (FOS). The new legislation gives consumers increased protections by enabling complaints to be taken to the FOS. This brings complaints procedures for BNPL firms in line with those of traditional lenders.
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Lenders offering BNPL will need to be approved by the FCA in order to lend.
- It's likely consumers will face tougher affordability checks when taking out a BNPL agreement
Currently customers are unable to take complaints about companies to the Financial Ombudsman and are not entitled to any breathing space when they cannot afford to repay, or compensation if things go wrong.
A recent survey by Citizens Advice found that 52% of people who had used BNPL made repayments from their current account, but 23% used a credit card, 9% used a bank overdraft and 7% borrowed from friends and family and recent research from the Centre For Financial Capability, a financial education charity, said people of all ages were now turning to the sector as they struggled with the cost of living, showing the need for urgent regulation.
Martin Lewis has previously said: "BNPL is often insidiously marketed as a simple payment option, or worse, a lifestyle choice. It’s not. It’s a debt, with all the dangers of debts."
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