Millions of shoppers who use buy now, pay later lenders face better protections under new rules announced by the government.
Firms such as Klarna and Clearpay have seen demand surge by allowing customers to spread out the cost of purchases. But campaigners have warned they have also led to borrowers facing a “debt nightmare”. The Government has now stepped in by launching a consultation on proposals. However, the sting in the tail is that the rules won’t come into force until 2026 – meaning a long wait.
The proposals include bringing buy now, pay later companies under the supervision of the Financial Conduct Authority and applying the Consumer Credit Act. Doing so will mean lenders will will have to check shoppers are able to afford repayments before offering a loan, which is designed to prevent people building up unmanageable debt. And they will also need to provide clear, simple and accessible information about loan agreements in advance.
Customers will be given stronger rights if issues arise with products they buy, 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.
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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.”
Martin Lewis, founder of MoneySavingExpert.com, said: “Buy now, pay later is now ubiquitous at online checkouts, so the fact it’s never been regulated is a travesty I and others have long campaigned on. The last Chancellor promised to regulate, then the tumbleweed rolled as he went silent, so I am delighted the new Government has quickly restarted the process.
“BNPL can be useful, allowing those who need to spread payments for a budgeted, necessary purchase like a plumber to do it interest-free. Yet it’s been sold as a lifestyle choice, not a debt, and pushed for instinct buys or even takeaways. Too many are in trouble with multiple BNPL repayments, leading to debt-chasing and credit file damage.
“Regulation will mean firms must be overt that it’s a debt, have proper affordability rules, and will crucially let people go to the ombudsman if things go wrong. Yet it’s not coming in until 2026, so people should still be very wary until then.”
Dame Clare Moriarty, chief executive of Citizens Advice, said: “We’ve long called for regulating the buy-now pay-later market and are glad to see the government making this a priority. We know the difference this can make to so many people’s lives.
“Compared with two years ago, our advisers are helping more than twice as many people with a BNPL issue. Many are struggling to repay credit they can’t afford or falling behind on essential bills or needing emergency support, like food bank vouchers. Proper regulation can prevent this spiral.”
Labour MP Stella Creasy said: “Finally the end of the BNPL debt nightmare for millions is in sight – for five years we’ve been pleading with the Tory government to tackle these legal loan sharks who have caught millions of people into a cycle of debt by encouraging them to borrow more than they can afford.
“They get away with doing this because consumers have few safeguards against being missold credit by them but the last government was blind to the dangers of them. With Christmas on the horizon regulation cannot come a moment too soon as without it my constituents are still better protected from being ripped off by paying using a credit card or even a payday loan, so its critical when the consultation ends this happens as quickly as possible”
Richard Lane, Chief Client Officer at StepChange Debt Charity, said: “After several years of raising concerns around Buy Now, Pay Later (BNPL) as an unregulated form of credit, we’re pleased to see the Government following through on its commitment to regulate BNPL and prioritise consumer protection from problem debt. BNPL can be a useful form of credit for those looking to manage chunky expenses but, as with every other form of credit, it needs to be bound by consistent rules that minimise consumer harm.
“We need to see BNPL providers introduce proper affordability checks and end aggressive marketing at checkout, which can lead to impulse decision making and can cloud consumers’ judgement on affordability. As cost of living pressures continue to burden millions of households, consumers need more protection, not less. A properly regulated BNPL sector will go some way to facilitating that.”