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Clampdown on buy now pay later borrowing

Emma Lunn
Written By:
Emma Lunn

Interest-free buy now, pay later (BNPL) payment services will be regulated by the Financial Conduct Authority (FCA).

The move comes after the fast-growing sector has come in for increased criticism for encouraging consumers to spend more than they can afford.

Firms such as Klarna, Clearpay and Laybuy offer shoppers the option to pay for relatively small purchases in three monthly instalments or, in some cases, the option to delay payment for up to 30 days.

Under new rules, lenders will be required to carry out affordability checks on customers and ensure the vulnerable are treated fairly.

The volume of BNPL transactions tripled in 2020 as the pandemic drove online shopping. The FCA says there is now a significant risk that these agreements could cause harm to consumers.

John Glen, economic secretary to the Treasury, said: “Buy-now-pay-later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular. 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.”

Although the average transaction tends to be relatively low, shoppers can take out multiple BNPL agreements with different providers. A review by the FCA found it would be relatively easy to accrue around £1,000 of debt that credit reference agencies and mainstream lenders can’t see.

With several BNPL providers planning to expand to higher-value retailers, or offer their products in-store, the FCA says the risk that consumers could take on unaffordable levels of debt is increasing.

A survey by Compare the Market found a fifth of buy now pay later (BNPL) users are unable to pay back Christmas spending without taking on more debt.

Gareth Shaw, head of money at Which?, said: “We’ve highlighted how the buy now, pay later market can encourage some people to spend more than they can afford, so regulation to protect consumers from building up large debts that they will struggle to pay off is clearly required.

“As buy now, pay later services continue to surge in popularity at a time when people’s finances are under significant pressure, there is no time to lose. New rules covering this type of lending must be introduced as soon as possible to ensure action can be taken if firms are treating customers unfairly.”

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The fact this borrowing is interest-free makes it feel safer, but there are inherent dangers. Fewer checks on borrowers mean a bigger risk people are taking on debts they won’t be able to manage.

“One bank told the FCA that one in 10 of its customers who use these products are already in arrears. If shoppers can’t afford to make payments, they may have to make late payment fees, and will start carrying arrears.

“Buy now pay later encourages people to focus on the cost of the first instalment, so it means they’re more likely to buy things they don’t need and can’t afford. The more deals they take out, the bigger the burden of instalments, and with all the uncertainty of the pandemic, there’s always the chance their circumstances could change and push these payments out of reach.”