Buy now pay later firms will come under FCA regulation

Buy now pay later (BNPL) credit agreements will be regulated by the Financial Conduct Authority (FCA), the Government has announced.

Such products allow shoppers to spread purchase costs interest-free at the checkouts – meaning they may not need to turn to expensive borrowing.

But they have been criticised for potentially encouraging people to spend more than they had planned and getting into debts that they cannot comfortably pay back.

Under the plans, providers will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.

The volume of transactions tripled in 2020 as the coronavirus pandemic drove online shopping, and there is now a significant risk that these agreements could cause harm to consumers, the Government said.

By announcing plans to legislate to bring interest-free BNPL products into regulation, the Government said it is acting swiftly to ensure people can continue to benefit from the products with the right protections.

The announcement comes as a review of the unsecured credit market, led by Christopher Woolard, recommended bringing interest-free buy now pay later into FCA supervision.

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.”

The Woolard Review found several potential harms which can be mitigated by bringing these agreements into regulation.

Many consumers do not view interest-free BNPL as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer.

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

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

Bringing providers under the FCA’s regulation means people will be able to take complaints to the Financial Ombudsman Service (FOS) if they are unhappy with the response they get from the firm.

A consultation will take place before legislation is brought forward to ensure the approach to regulating buy now pay later firms is proportionate.

The Government will be bringing forward legislation as soon as parliamentary time allows.