Kevin Peachey
Cost of living correspondent
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Shoppers using buy now, pay later (BNPL) will need to pass stricter affordability checks under new rules coming into force next July.
It means some shoppers will be refused this type of credit and the ability to splash out on something potentially unaffordable in a few clicks could be slowed down.
Regulators say it will prevent people from taking on too much debt and being caught out by late payment fees.
Nurse Julie Rowbottom told the BBC that it was “easy to fall into a trap” with this kind of borrowing.
She said having the option at your fingertips made life easier, but the debt “could easily and quickly mount up” so she had managed her finances carefully to avoid falling into a spiral.
Julie says people need to be careful with buy now, pay later because it is convenient
BNPL offers shoppers interest-free credit, allowing them to buy something immediately, then repay in 12 or fewer instalments within 12 months or less.
Huge operators such as Klarna and Clearpay have emerged and are offered as a payment method by many of the UK’s biggest retailers.
Some 11 million people in the UK have used buy now, pay later in the last year, the City watchdog – the Financial Conduct Authority (FCA) – estimated.
Its survey found 30% of adults aged 25 to 34 had used it at least once in the 12 months to May 2024. The most common use was for “lifestyle and beauty purchases” and “treating myself or other people”, it found.
BNPL is currently unregulated which means that lenders do not need FCA approval to operate.
‘Wild west’
Charities have made repeated demands for extra protection, after seeing increasing numbers of people get into financial trouble.
Vikki Brownridge, chief executive of StepChange Debt Charity, described the new proposals as “a significant step forward” in bringing the sector in line with other types of credit.
“Buy now, pay later users are twice as likely as all credit users to borrow to cover essential bills, and our research also found that BNPL is now as common as using an overdraft amongst UK adults,” she said.
In recent days legislation has passed which means the FCA can now consult on its plans to regulate the sector – after years of promises from politicians to control the “wild west” of lending.
The plans should lead to upfront checks on affordability, as well as faster access to refunds for consumers, and the right to complain to the Financial Ombudsman.
It should also lead to clear information about cancellation rights, charges and any impact on credit ratings if a payment is missed.
Over 10 years, regulators estimate consumers will be £1.8bn better off as a result, while providers’ profits will drop by £1.4bn owing directly to fewer transactions.
But it said it wanted to give lenders “flexibility” over how they applied the new rules, including affordability assessments.
That could see different lenders using different ways to test if people can cover the repayments.
Alison Walters, interim director of consumer finance at the FCA, said: “We are not prescribing how firms do it, because digital journeys will vary. But the firms must carry out an affordability check to ensure that consumers can afford to repay that borrowing.
“Credit is not right for everybody. There will potentially be consumers who will not be able to access this product and firms can signpost them to other support like debt advice.”
‘Major win for consumers’
Leading providers have said they are fully supportive of regulating the sector in the UK, but it must allow companies to innovate while also protecting consumers.
A spokesman for Klarna said: “After five years of constructive work with the Treasury, we’re entering the home straight to make buy now, pay later regulation a reality – a major win for UK consumers.
“We are looking forward to working with the FCA on rules that protect consumers while keeping choice and innovation at the heart of the UK credit market.”
However, the proposals come in the same week as Chancellor Rachel Reeves said less regulation was needed in financial services. The FCA said some of the buy now, pay later protection will come under current FCA regulation schemes.
Consultation on the FCA’s plans will run until late September.
There will be a temporary regulation regime in place before new rules take effect next July. This means firms will need to follow FCA rules and will be able to continue to trade before they are fully authorised.