Buy Now Pay Later lenders to face same rules as banks

The Government has announced new legislation will see Buy Now Pay Later (BPNL)  lenders fully regulated by the Financial Conduct Authority (FCA), meaning firms will be required to conduct affordability checks on consumers before offering loans.

The announcement is backed by brand new reforms as part of the new  Consumer Credit Act. The new regulation will require BNPL lenders to carry out an affordability check to ensure people do not take on too much debt. The new approach will see such lending covered by the same rules as mainstream banks and regulated by the Financial Conduct Authority. The reforms will also enable faster access to refunds, and borrowers will be able to make complaints to the Financial Ombudsman Service.

Over 10 million people who use Buy-Now, Pay-Later (BNPL) products will gain stronger rights and clearer protections under the new rules.

Emma Reynolds, Economic Secretary to the Treasury, said “Buy-Now, Pay-Later has transformed shopping for millions, but for too long has operated as a wild west – leaving consumers exposed. These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow, and create jobs through our Plan for Change.”

StepChange’s Chief Client Officer, Richard Lane, said “Regulation of the Buy Now, Pay Later sector is long overdue, with inconsistent affordability checks and a lack of rules around marketing leaving consumers vulnerable to debt problems while using this type of credit. For years now, we’ve seen first-hand the impact of BNPL services operating unregulated, with people struggling with multiple BNPL debts across several retailers, and often it’s among those who are already in financial difficulty and using credit to make ends meet.

“As it’s generally interest-free, BNPL can be a useful and convenient way to manage chunky expenses, but it’s crucial that consumers receive the same protections as they would with other forms of credit.

“With a clearer outline expected of what new rules around BNPL will involve, today’s announcement is welcome progress toward proper regulation of BNPL. It’s been a long road to get here, and we hope to see the government follow through on this commitment as quickly as possible.”

Erin Sims, Financial Services Senior Analyst at RSM said “Firms are urged to prepare for new regulations by taking steps to implement the proposals being pushed through by the Treasury. Under the proposals, lenders will have to check that consumers are able to afford repayments before offering a loan and provided with clear information on the terms of the product. Consumers will also have fairer access to refunds and the right to complain to the Financial Ombudsman.

“Deferred payment consumer credit has risen in popularity over recent years, with over a third of shoppers having now used BNPL services to spread the cost of purchases. The FCA reported only last week that one in 10 Britons have no cash savings, so pushing through regulation is essential for increased consumer protection.

“The objective to regulating the currently readily available BNPL credit option will not only enhance consumer protection but could also lead to a shift in consumer behaviour. If consumers had ordinarily taken a more cautious approach to this product, then the regulated BNPL option may become more akin to other credit facilities, prompting consumers to reconsider their options. Overall, this could result in increased competition within the credit ecosystem, with traditional lenders facing pressure to adopt more BNPL-like features, such as instalment payment options. The shift would also represent a fresh opportunity for credit bureaus as firms turn to them for verification and affordability checks.”