Buy now, pay later (BNPL) credit agreements will be regulated by the Financial Conduct Authority (FCA) following a surge in shoppers turning to such products during the coronavirus pandemic.
The agreements, provided by firms such as Klarna and Clearpay, allow shoppers to spread purchase costs interest-free at the checkout.
Options often appear on fashion websites and evidence suggests they are particularly popular with women and younger adults.
But they have been criticised for potentially encouraging people to spend more than they had planned and getting into debts that they cannot comfortably pay back.
In some instances, BNPL offers may be presented as the default payment method and some retailers will give shoppers about five BNPL options.
We’ve announced plans to regulate interest-free buy-now-pay-later credit agreements, giving consumers greater protection:
✅ affordability checks✅ fair treatment for customers facing difficulties✅ access to the Financial Ombudsman
— HM Treasury (@hmtreasury) February 2, 2021
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.
The volume of BNPL transactions tripled in 2020 as the coronavirus pandemic drove online shopping, and there is now a significant risk that these agreements could cause harm to consumers, the Government said.
The announcement was made as a review of the unsecured credit market, led by Christopher Woolard, recommended bringing interest-free buy now, pay later into FCA supervision.
The Woolard Review found several potential harms which can be mitigated by bringing these agreements into regulation.
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 – and the review found 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 said: “Clearly that’s not the case. Retailers present it as a very prominent option… and also multiple options can be presented at checkout.
“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.”
He said that “no real” reporting back to credit reference agencies was going on.
Mr Woolard, a former interim chief executive at the FCA, continued: “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.”
Bringing providers under the FCA’s regulation 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.
Some BNPL scheme providers said they welcomed being brought FCA under regulation.
Damian Kassabgi, from BNPL provider Clearpay, said: “We welcome today’s recommendations and look forward to working with the FCA, the Government and stakeholders to build on the consumer protections we already provide to create the applicable regulation for the sector.
“It has always been Clearpay’s view that consumers will be best served by products designed with strong safeguards and appropriate industry regulation with oversight from the FCA.”
Klarna said it “wholeheartedly supports the regulation of the buy now, pay later sector in the UK”.
It said in a statement: “We agree that regulation has not kept pace with new products and changes in consumer behaviour and it is now essential that regulation is modern, proportionate and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences.
“This is why we welcomed the Woolard Review into change and innovation in the unsecured credit market. We have fully engaged in this process and we now look forward to working together with the FCA, Government and the wider sector to build a modern regulatory and supervisory framework that delivers the best outcomes for customers.”
Caroline Siarkiewicz, chief executive of the Money and Pensions Service, said: “This has come at a crucial time as many people face increased financial pressures as a result of the Covid-19 pandemic.
“I urge anyone who is worried or struggling to keep up with bills or financial commitments to speak to our Money Advice Service for free, confidential support.”
John Glen, Economic Secretary to the Treasury, said: “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.”