‘Buy now, pay later’ (BNPL) schemes are to be regulated by the Financial Conduct Authority (FCA) under plans announced by the Treasury today.
BNPL schemes – such as Klarna, Laybuy and Clearpay – offer interest-free credit at the checkout, allowing you to spread the cost of a purchase over a series of repayments.
Though the schemes are convenient and easy to sign up to, Which? has identified a number of concerns with how they work, which we shared with the FCA and the Woolard Review into the unsecured credit market.
The FCA’s review also found several potential harms for BNPL users, leading the financial regulator to recommend regulation of the sector.
Which? is calling for new rules to be introduced as soon as possible, to ensure action is taken where firms treat customers unfairly.
Here, we explain the FCA’s concerns and the new rules for BNPL schemes once they’re regulated.
What are the potential harms for BNPL users?
The FCA’s review found that BNPL products are rapidly increasing in popularity.
The BNPL industry nearly quadrupled in 2020, with five million people using one of the schemes since the beginning of the pandemic.
This acceleration means there’s a significant risk that the schemes could cause harm to consumers.
One of the main concerns is around customers taking out more debt than they can afford.
Checks by providers tend to focus on the risks to the firm, rather than whether customers can afford to make repayments.
And although transactions are relatively low on average, between £65 and £75, customers could be using a number of BNPL schemes at the same time.
The review found it would be relatively easy to accrue £1,000 of debt that credit reference agencies and mainstream lenders can’t see.
One bank reported one in ten of its customers who used BNPL schemes were already in arrears.
Which? had similar concerns following an investigation, looking at how BNPL firms encourage impulse buying.
Our survey of 2,000 members of the general public found that a quarter of BNPL users spent more than they’d planned to because BNPL was available at the checkout.
We also uncovered concerns around the size of BNPL ads on retailers’ websites and some retailers offering shoppers a discount if they used BNPL to pay.
- Find out more: 44 tips for getting out of debt
Customers could be misled
The FCA’s research also revealed that many consumers don’t view interest-free BNPL as a form of credit.
This means consumers don’t use the same level of scrutiny when shopping online as they might when taking out a loan or using a credit card.
The fact that the schemes are interest-free, and are fast and easy to sign up to, could therefore be misleading customers.
Another Which? investigation also found that some customers have shopped with fraudulent retailers, or retailers with incorrect returns policies, after being exposed to the stores through BNPL schemes.
In addition to assessing whether you can afford to take on the debt, Which? has also urged BNPL customers to check unfamiliar retailers’ T&Cs before shopping with them.
- Find out more: more than 170 retailers flouting refund rules
What will change and when?
Regulation means the FCA will have oversight of how the BNPL schemes operate.
It can step in if people are being treated unfairly or if people are offered agreements they can’t afford.
Once regulated, BNPL lenders will have to carry out affordability checks before agreeing to let you borrow at the checkout.
They’ll also have to ensure the vulnerable are treated fairly, particularly those struggling with repayments.
And if you run into any issues when using a BNPL scheme, you’ll be able to escalate your complaint to the Financial Ombudsman Service.
These changes won’t come into force immediately, though the FCA has said regulation should happen ‘as a matter of urgency’.
The Government will consult with stakeholders before bringing forward legislation ‘as soon as parliamentary time allows’.
- Find out more: how to take a complaint to the Financial Ombudsman Service
‘There is no time to lose’
Which? has reported on BNPL schemes – and the harms experienced by consumers – since 2018.
Our investigations have uncovered:
- Fraud reports from Klarna customers
- Confusion over whether BNPL schemes impact credit scores
- New BNPL schemes launching with high late fees
- Reports that BNPL customers are left waiting for refunds when returning items
- Evidence that BNPL firms encouraging impulse spending
- Concerns that BNPL firms might lead customers to shop with retailers with incorrect returns policies
We previously called for regulation of the schemes to ensure the FCA can intervene where consumers are being harmed by BNPL business practices.
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.’
- Find out more: how to use BNPL schemes safely