Interest-free “buy-now-pay-later” (BNPL) deals face tighter regulation under plans announced by the government.
A review published by the Financial Conduct Authority (FCA) found that the currently unregulated use of BNPL products nearly quadrupled to £2.7bn during 2020 and five million people had used them since the start of the pandemic.
It concluded the market should be brought under regulation “as a matter of urgency” as there was “significant potential for consumer harm”.
The Treasury said interest-free BNPL agreements will now be regulated by the FCA.
It means that providers will need to undertake affordability checks before lending and ensure that customers are treated fairly, especially those who are vulnerable and struggling with repayments.
The changes – which the government will aim to implement through legislation – will also mean people can contact the Financial Ombudsman if they have a complaint.
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 outcome of the review by the FCA’s former interim chief executive Christopher Woolard confirms a story first reported by Sky News.
It will mean the watchdog’s regulatory perimeter expanding to encompass the activities of companies such as Klarna and Clearpay, which have seen their customer numbers surge over recent months.
The government said many consumers do not view interest-free BNPL deals as a form of credit so do not apply the same level of scrutiny and that checks undertaken by providers tended to focus on their own risks rather than how affordable deals are for customers.
While average transaction amounts tend to be relatively low, purchases can soon stack up and it would be “relatively easy” to end up with £1,000 of debt that credit reference agencies and mainstream lenders cannot see.
The government said that with BNPL providers planning to expand their offer to higher-value retailers, or offer their products in-store and not just online “the risk that consumers could take on unaffordable levels of debt is increasing”.
A spokesman for Klarna told Sky News on Monday: “We agree that regulation has not kept pace with new products and changes in consumer behaviour and it is now essential that regulation is modern and fit for purpose, reflecting both the digital nature of transactions and evolving consumer preferences.”
Gary Rohloff, co-founder of Laybuy, another BNPL provider, said: “We believe we are already in a good place when it comes to regulation.
“There needs to be a balance to protect consumers, but also make sure it retains the innovation and simplicity that consumers value.
“We will work closely with the regulator and the Government ahead of the next steps.”