The government announced its intention to bring interest-free BNPL products into regulation back in February after the Woolard Review, commissioned by the Financial Conduct Authority (FCA), highlighted the potential risk of consumer detriment in the sector.

The move comes after BNPL has come in for increased criticism for encouraging consumers to spend more than they can afford. Earlier this week an advert for DivideBuy was banned by the Advertising Standards Authority (ASA) for being ‘socially irresponsible’.

The Treasury consultation sets out policy options to achieve a ‘proportionate approach’ to regulation of BNPL.

The consultation will consider the potential scope of regulation, to target as closely as possible products where consumer detriment could arise. It also seeks views on a range of regulatory controls that could be put in place for BNPL, so that they are focused on those elements of lending practice that are most closely linked to the potential consumer detriment in this market.

Anthony Morrow, co-founder of OpenMoney, said: “We’re pleased to see the launch of this long-awaited consultation on regulating BNPL schemes. We strongly believe that these services make it too easy to take on debt without fully thinking about how to pay it back and what might happen if you don’t. By playing on our fear of missing out, they make it incredibly quick and simple to buy things we don’t really need, convincing people to take on unnecessary debt with just a few easy clicks.”

The consultation recognises that the ‘frictionless’ process so valued by retailers to achieve smoother sales and increased volumes can be a driver of harm for some consumers, and makes pre-contractual disclosure and ongoing consumer protection so important.

Debt charity StepChange argued these points to the FCA’s Woolard Review last year. The charity said that the consultation ‘marks a watershed’ in the recognition that BNPL is credit, with implications for the need for adequate consumer protection against harm, matching existing Consumer Credit Act and Financial Conduct Authority protections.

Peter Tutton, StepChange head of policy, research and public affairs, said: “We look forward to contributing our formal response to the consultation, but already we can see that the government is taking seriously its promise to regulate the BNPL market, and recognise that BNPL is credit, which has the potential to cause harm without adequate consumer protections.

“Where there are some important choices to be made – such as how widely the definition of BNPL should be drawn, and what the regulatory position of retailers should be – we would like to see the protection of consumers being the first and guiding principle of the final framework. We hope the introduction of regulation can be implemented at pace, given the rapid rise of BNPL.”