Lenders specializing in the “buy now, pay later” service must comply with the same rules as mainstream banks that have long been expected to have legislation, which will result in them being adequately regulated by financial conduct authorities.
The UK government will introduce legislation on Monday after a conservative government announced plans to oversee the department's plans for more than four years.
Under the rules, lenders (such as Klarna and Clearpay) will be required to check the shopper’s affordability before providing the loan, and the borrower will be able to file a complaint with the Financial Ombudsman.
“These new regulations will protect shoppers from debt traps and provide the industry with the certainty needed to invest, grow and create jobs,” said Emma Reynolds, Treasury Economic Secretary.
“Buy now, pay later changed millions of dollars in shopping, but it has long been a wild west – exposing consumers.”
The Treasury said it would also reform the Consumer Credit Act to create a “modernization, growth framework that reflects how people borrow today.” The financial technology industry has long complained that the 51-year-old regime and some of its disclosure requirements are not suitable for purposes in the digital age.
In recent years, “buy now, pay now” loans (called BNPL) have flourished, allowing consumers to pay in short-term installments without paying. According to the U.S. Treasury Department, more than 10 million people use the product in the UK.
However, the industry has been unregulated and there is no need to perform affordability checks on potential users. Consumer groups warn that borrowers may accumulate uncontrollable debt from late fees under the current regime.
Lisa Webb of Consumer Group said it was "good" that ministers finally regulated the industry, but the government "also needs to make sure that this includes greater marketing transparency and information on the risks of missed payments and credit checks".
Research commissioned by Financial Capition Center, a UK-based financial education charity, found that nearly a quarter of such loans were charged delayed repayments for the six months to December 2023.
Klarna, one of the leading providers, said: “Interest-free BNPL is an important alternative to high-cost credit for millions of Brits and we support regulations that ensure their safety and accessibility since 2020.”
It added, “It’s great to see the progress of regulations and we look forward to working with the FCA to protect consumers and encourage innovation”.
The UK announced plans to regulate the industry in 2021, with the Treasury consulting on the idea in 2023, but later postponed the implementation of the draft legislation.