Buy now, pay later firms to come under stricter controls - what you need to know

The services allow shoppers to spread payments interest-free at the checkout (Photo: Shutterstock)The services allow shoppers to spread payments interest-free at the checkout (Photo: Shutterstock)
The services allow shoppers to spread payments interest-free at the checkout (Photo: Shutterstock)

Buy now, pay later (BNPL) credit agreements will face stricter controls by regulators, the government has announced.

These services, such as Klarna, Clearpay and LayBuy, are offered through major retailers and allow shoppers to spread payments interest-free at the checkout. Customers can pay for large items in instalments or, in some cases, defer payments for up to 30 days.

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However, the Financial Conduct Authority (FCA) has criticised the services for potentially encouraging people to spend more than they had planned, pushing them into debt that they cannot comfortably pay back.

The FCA will now regulate the sector, after the value of such services saw a near fourfold rise last year.

Affordability checks

Pay later services have proved particularly popular with younger shoppers, with BNPL transactions tripling in 2020 as the pandemic led to a rise in online shopping.

Estimates suggest that £4 in every £100 currently spent in the UK uses buy now, pay later.

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However, one in 10 people using them already had debt arrears somewhere else, according to an FCA review into credit services.

The Government has said there is now a significant risk that such credit agreements could cause harm to consumers, prompting the need for stricter controls.

Under the plans, providers will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.

By announcing plans to legislate to bring interest-free BNPL products into regulation, the Government said it is acting swiftly to ensure people can continue to benefit from the products with the right protections.

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The announcement comes as a review of the unsecured credit market, led by Christopher Woolard, recommended bringing interest-free buy now pay later into FCA supervision.

John Glen, Economic Secretary to the Treasury, said: “Buy now pay later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular.

“By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”

Up to £1,000 of debt

The Woolard Review found several potential harms which can be mitigated by bringing these agreements into regulation.

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Many consumers do not view interest-free BNPL as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer.

Although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers, with the review finding it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders cannot see.

Mr Woolard told a journalists’ online briefing that many BNPL consumers assume that because they are making a financial transaction, they have certain protections if something goes wrong.

He explained: “Clearly that’s not the case. Retailers present it as a very prominent option… and also multiple options can be presented at checkout.

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“So if you go on some retailers’ websites, you’ve got about five choices there of buy now, pay later when you’re at the checkout, not just one. And it’s not always clear what the difference between them might be.”

“Each individual retailer may say to you, ‘Well, we only extend £200 on the first transaction’… But the reality is that when consumers are offered, say, a choice of five at the checkout, we know their behaviour is to say, ‘Well, I’ll get credit, I’ll exhaust my credit with one, then I’ll move on to the next then I’ll move on to the next’.

“So it’s quite easy for a consumer to rack up about £1,000 or so without much effort on their part.”

By bringing providers under the FCA’s regulation, this means people will be able to take complaints to the Financial Ombudsman Service (FOS) if they are unhappy with the response they get from the firm.

A consultation will take place before legislation as soon as parliamentary time allows.

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