‘Buy now, pay later’ schemes could be regulated by the end of the year
The Treasury has today (14 February) launched a long-awaited consultation that represents the next step in giving millions of borrowers who use ‘buy now, pay later’ (BNPL) schemes such as Klarna and Clearpay better rights and protections.
BNPL schemes typically offer short-term, interest-free borrowing but are not currently regulated by the Financial Conduct Authority (FCA), unlike more traditional forms of credit. This means borrowers have fewer safeguards if something goes wrong.
The publication of the draft legislation comes over two years after the Government said it would regulate the industry. Here, Which? explains what the new BNPL rules could include and when they are expected to come into force.
What will the new BNPL rules include?
The eight-week consultation the Treasury has opened is gathering feedback on draft legislation proposed to strengthen the rules around BNPL lending.
Under the plans it wants to make sure firms:
- Clearly explain key information about the loans to customers
- Give borrowers the right to complain to the Financial Ombudsman Service (FOS)
- Conduct affordability checks to make sure the loans are affordable to borrowers
- Ensure advertising is clear, fair and not misleading
- Give borrowers Section 75 protection on purchases made with BNPL schemes
The new rules would also give the FCA the power to ban BNPL companies from further lending if it found them in breach of its policies.
The government said the new procedures would help protect an estimated 10 million customers.
Why do BNPL rules need to be changed?
Which? has been calling for BNPL products to be regulated for the past few years.
While these short-term loans have their benefits in allowing you to spread the total cost of a purchase, they're not regulated in the same way other loan options are, which could leave consumers unprotected.
Our research has found the services encourage impulse buying, with almost a quarter (24%) of BNPL users sharing that they spent more than they planned to because BNPL was available at the checkout.
We've also uncovered how online shoppers were being bombarded by BNPL options at the checkout with little warning of the risks of taking on the debt or late fees.
Our research also found families and those who are facing financially challenging times are more likely to use BNPL services and many BNPL users do not think they're taking on debt when deciding to pay later at the checkout.
Which? has raised concerns before around how BNPL providers and retailers promote 'pay later' products, including JD Sports' promotions, which incentivise shoppers to use BNPL schemes in exchange for free delivery, and Zilch advertising BNPL credit for groceries and takeaways.
With the cost of living on the rise, the urgent introduction of robust affordability checks is key to protecting consumers from spiralling debt.
- Find out more: BNPL schemes explained
'An important step to protect BNPL users'
Rocio Concha, Which? director of policy and advocacy said: ‘Buy now, pay later options appear at many online checkouts, but our research shows that many users do not realise they are taking on debt or consider the prospect of missing payments, so the government's proposed new rules and legislation are an important step.
‘The government must ensure there are no delays to introducing these changes and that consumers are given stronger safeguards to protect and warn them about the risks of using BNPL schemes. This needs to include greater marketing transparency and information about the risks of missed payments and credit checks before consumers are cleared to use BNPL providers.’
- Find out more: how to pay off your debts
When will BNPL borrowing be regulated?
The latest consultation on the proposed draft legislation that will bring BNPL under FCA regulation will be open for eight weeks until 11 April 2023.
The government then intends to publish a response to the consultation in which it will set key milestones for regulation, followed by getting the finalised legislation into place.
It said it will ‘lay [the] legislation when Parliamentary time allows’, and is striving to have this done sometime in 2023.
- Find out more: how to use ‘buy now, pay later’ schemes safely
