How proposed buy now, pay later regulations will protect shoppers

Shoppers are set to be protected by new rules when using buy now, pay later (BNPL) schemes but regulations may not be introduced until at least 2026.

The Treasury has launched a consultation on legislation that would let the Financial Conduct Authority (FCA) fully regulate BNPL firms.

It comes amid concerns that vulnerable shoppers could end up in more debt by paying for items using BNPL if they fall behind on repayments.

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Under proposed regulations, customers would have to be properly assessed to see if they can afford a BNPL plan and would have similar rights to refunds when paying by credit card under Section 75 rules.

The previous government had committed to regulating BNPL but legislation never materialised.

Tulip Siddiq, economic secretary to the Treasury, said: “Millions of people use Buy-Now, Pay-Later to manage their finances, but the previous government’s dither and delay left them unprotected.

“We promised to take action before the election and now we are delivering. 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.”

What is buy now, pay later?

BNPL schemes have become popular in recent years, letting shoppers spread the cost of an item over a fixed term, often three months.

It can be used to purchase anything from clothes and electrical items to food and takeaways.

Similar to a credit card, there is no interest to pay if you make the monthly payments on time. But the interest charged can be high if you miss a payment, plus there may be late fees.

Major providers include Klarna and Clearpay but other brands such as PayPal and John Lewis have entered the sector.

BNPL products are currently unregulated and there are concerns that vulnerable shoppers could be too-easily tempted into taking out the products and falling into debt.

The FCA’s Financial Lives Survey last year showed 27% of UK adults have used BNPL at least once in the six months prior to January 2023. This was up from 17% who said they had used it in the preceding 12 months in May 2022.

The research also found that frequent users of BNPL are more likely to be in financial difficulty.

Consumers who have used BNPL more than 10 times were twice as likely as those who have not used BNPL to also have a high-cost credit product and four times as likely to have missed a payment of a bill or credit commitment in three of the past six months.

How will buy now, pay later be regulated?

Currently, there isn’t much the FCA can do to ensure consumers are protected and given access to appropriate products.

It does have powers to look at advertising and consumer contracts but the Treasury is now consulting on letting it regulate the firms involved.

Under the proposed legislation, the FCA would be able to apply rules on affordability – meaning that companies will have to check that shoppers can afford repayments.

BNPL providers will have to provide clear, simple and accessible information about loan agreements in advance.

The Treasury said BNPL users will also be given stronger rights if issues arise with products they purchase, making it quicker and easier to get redress. This includes applying Section 75 of the Consumer Credit Act, which allows consumers to claim refunds from their lender, and access to the Financial Ombudsman Service to make complaints.

Mortgage brokers have welcomed the move, warning that BNPL schemes can often alarm lenders on an application.

Ben Perks, managing director at Orchard Financial Advisers, said: "This is long overdue.

“When I saw recently that you can buy a Domino's on Klarna I was flabbergasted. If you're not savvy, you could easily sleep-walk into major debt. The ease of access and casual attitude towards using buy now, pay later can be devastating and many don't realise how it can hamper your mortgage borrowing capabilities.”

But there are concerns about the pace of the changes.

It could take months for legislation to be introduced and the FCA said it could take another year after that for regulations to come in.

MoneySavingExpert founder Martin Lewis warned on Twitter that “people should still be very wary” as the protections are unlikely to go live until 2026.