Buy now, pay later lenders in the UK will be forced to carry out affordability checks and refrain from misleading advertising and promotions under new rules proposed by the UK government.
Under the long-awaited plans, lenders will be required to carry out affordability checks, ensuring loans are affordable for consumers, and will amend financial promotion rules to ensure BNPL advertisements are "fair, clear, and not misleading".
Lenders offering the product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take a complaint to the Financial Ombudsman Service (FOS).
Economic secretary to the Treasury, John Glen says: “By holding buy now, pay later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”
He says the government will publish a consultation on draft legislation toward the end of this year, with the aim of laying secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.
The long timeline has led to criticism by consumer champions who fear that millions of people in the UK have been saddled with unaffordable debt by taking advantage of easy-to-access BNPL lending with little understanding of the repercussions around failed repayments and credit scoring.
Martin Lewis of MoneySavingsExpert has lamented the "painfully slow" progress of the legislative process, noting that it will fail to protect consumers for the financially bleak winter coming.
"Buy now, pay later 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. It perverts purchasing decision-making, leaving many in a continuous loop of owe-owe-owe. Firms make money from it because people transact more via BNPL than they would otherwise.
"Debt shouldn’t be something you slip into, it must be an informed, active, conscientious choice. While in some cases BNPL can be a legitimately cheap way to spread the cost, amidst a cost of living crisis, people should always first ask themselves: ‘if I can’t afford to pay for it now, how will I afford to pay for it next month?"
Dame Clare Moriarty, chief executive of Citizens Advice, is equally unimpressed: “The Buy Now Pay Later sector continues to grow at a meteoric rate, but it could now remain unregulated for years.
“Every day spent waiting for regulation is yet another day that shoppers are left unprotected and ill informed. We’ve seen a shopper threatened with debt collectors after splitting the payment of a t-shirt and, more recently, a worrying two in five BNPL customers borrowing money to make repayments.
“The government’s proposed rules will provide vital protection to many, but it must turbo-charge these plans.”
The government has also confirmed that other forms of short-term interest-free credit, such as those used to pay for dental work or larger items like furniture, will be required to comply with the same rules, given the risks posed are similar and consumers should receive consistent protections from similar products. The rules will apply to businesses who partner with a third-party lender to provide credit, and the government is asking for further stakeholder feedback to confirm whether they should also apply to online merchants who directly offer credit for the purchase of their own products.
The regulatory package piles further misery on the once-giddy buy now, pay later movement which has been rocked by a re-evaluation of the future prospects for the market. The share price of listed BNPL firms has nosedived of late, while privately-owned companies like Klarna have had to offer massive discounts on their valuation to raise further funding.