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Affordability checks loom for buy now, pay later loans

Paloma Kubiak
Written By:
Paloma Kubiak

Customers applying for buy now, pay later loans will need to undergo checks to ensure they’re affordable, as part of plans announced by the government.

The growing buy now, pay later loan industry is currently unregulated, but it will come under the scope of the Financial Conduct Authority (FCA) in the coming months.

But in the meantime, the government has announced that as well as affordability checks, rules will be amended around the financial promotion of BNPL to ensure adverts are fair, clear, and not misleading.

Lenders offering BNPL will also need to be approved by the FCA, and borrowers will be able to take a complaint to the Financial Ombudsman Service (FOS).

BNPL schemes are a form of credit, giving shoppers the opportunity to buy something now and pay for it in the future. But because of the way some schemes work, they can quickly become expensive if the debt isn’t cleared, with interest and other charges added.

The government said that while the schemes can be a helpful way for millions of people to manage their finances and spread the cost of a purchase over time, they don’t currently have the usual full range of borrower protections.

As they’re rapidly increasing in popularity, this results in a “potential risk of harm to consumers”.

The government has also confirmed that other forms of short-term, interest-free credit, such as those used to pay for dental work or larger items like furniture, will be required to comply with the same rules announced today to ensure “consumers receive consistent protections from similar products”.

These rules will apply to businesses who partner with a third-party lender to provide credit, and the government is also seeking views on whether they should apply to online merchants which directly offer credit for the purchase of their own products.

‘Writing on the wall’

Laura Suter, head of personal finance at AJ Bell, said: “This move has been a long time coming, and parts of the industry have already pre-empted government regulation in order to prepare for tighter rules – having seen the writing on the wall months ago. However, lots of the industry is still deliberately opaque about how the schemes work, the level of fees you’ll pay and how missing debt payments can impact your credit report.

“Buy Now Pay Later can be a useful alternative form of debt for some people, but only if you have a clear plan to repay it and understand the debt you’re taking on. Far too many people opt for it as a payment option after being incessantly targeted with it at the checkout and don’t realise the longer-term implications of missing a payment. What’s more, until these rules are finalised, firms haven’t had to check the financial situation of someone using BNPL, meaning they could be handing over more borrowing to someone already up to their eyeballs in debt.”

‘Holding BNPL to high standards’

Economic secretary to the treasury, John Glen, said: “BNPL can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place.

“By holding BNPL to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”

Draft legislation on regulation of the “complex” sector will be published towards the end of this year. Secondary legislation is expected by mid-2023, after which the FCA will consult on its rules for the sector.