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Companies that focus on “buy now, pay later” services will soon be subject to the same regulations as traditional banks, thanks to new legislation that will place them under the full oversight of the Financial Conduct Authority.
On Monday, the UK government will introduce this legislation, over four years after the former Conservative government initially proposed regulating the industry.
According to the new rules, lenders like Klarna and Clearpay must assess customers’ ability to repay before providing loans, and consumers will have the right to escalate disputes to the Financial Ombudsman.
“These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow and create jobs,” said Emma Reynolds, economic secretary to the Treasury.
“Buy now, pay later has transformed shopping for millions, but for too long has operated as a wild west — leaving consumers exposed.”
The Treasury said it would also reform the Consumer Credit Act in order to create a “modern, pro-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 were not fit for purpose in the digital age.
The market for “buy now, pay later” loans — known as BNPL — has boomed in recent years, allowing consumers to spread their payments in short-term instalments with no interest. More than 10mn people use the product in the UK, according to the Treasury.
However, the sector has remained unregulated, with providers not at present required to run affordability checks on prospective users. Consumer groups have warned that borrowers risk accruing unmanageable levels of debt from late repayment fees under the current regime.
Lisa Webb, of consumer group Which?, said it was “good” that ministers were finally regulating the sector, but said the government “also needs to ensure this includes greater marketing transparency and information about the risks of missed payments and credit checks”.
Research commissioned by the Centre for Financial Capability, a UK-based financial education charity, found that almost a quarter of such loans were charged late repayment fees in 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’ve supported regulation to keep it safe and accessible since 2020.”
It added that it was “good to see progress on regulation, and we look forward to working with the FCA on rules to protect consumers and encourage innovation”.
The UK announced plans to regulate the sector in 2021 and the Treasury consulted on the idea in 2023 but later delayed the implementation of draft legislation.
