The Treasury has today (Monday 20 June) set out plans to strengthen the rules for 'buy now, pay later' (BNPL) schemes, such as Klarna and Clearpay, as part of its regulation of the sector.
BNPL schemes are a form of credit, allowing you to spread your payment across multiple instalments, or pay at a later date, interest-free.
Right now, these short-term interest-free schemes are not regulated by the Financial Conduct Authority (FCA), unlike more traditional forms of credit, sparking concerns that BNPL users could fall into unaffordable debt with little protection if something goes wrong.
The Treasury first announced its plans to , but today has published a more detailed outline of what regulation will look like following its consultation. Under the new rules proposed by the government, lenders will now need to be approved by the FCA before offering their BNPL products to shoppers.
Here, Which? looks at what the plans mean for BNPL shoppers and when the changes are likely to come into force.
BNPL schemes will be required to carry out affordability checks to ensure their lending is responsible.
Currently, there is no consistency in how BNPL firms judge shoppers' affordability. Some BNPL firms only run soft credit checks while others, such as Clearpay, don't run any checks at all and instead will start by giving you a low limit which increases if you make repayments - protecting the firm but not necessarily the shopper.
With the cost of living on the rise, the urgent introduction of robust affordability checks is key to protecting consumers from spiralling debt.
The government also looked at BNPL ads and promotions.
It's proposed that financial promotion rules should be amended to ensure BNPL ads are fair, clear and not misleading, as laid out within the financial promotions regime.
This means that BNPL promotions set out by retailers will need to be approved by an 'authorised person' which could be the BNPL firm.
If something goes wrong with your BNPL repayments, you can't currently take your complaint further than the BNPL scheme itself.
The FOS is an independent service that can help you deal with unresolved complaints about regulated credit products - it's currently not available for BNPL shoppers, leaving them at the mercy of their provider's buyer protection policy.
This means you'll be able to make a claim with your BNPL scheme if something goes wrong, such as your parcel going missing or receiving a faulty product.
Some BNPL transactions will fall outside this threshold, as many payments made using BNPL are for orders worth below £100, but the government says this ensures consistency across all credit products.
Other forms of short-term interest-free credit, such as those used to pay for dental work or larger items like furniture, will also be required to comply with these new rules.
Unfortunately, these plans will take a while to kick in - the government says draft legislation will be published towards the end of the year, followed by secondary legislation by mid-2023, after which the FCA will run a consultation.
Given the lack of protections in place for BNPL users, Which? is calling for these changes to be made urgently to ensure shoppers that use the schemes don't run into financial difficulties.
Rocio Concha, Which? Director of Policy and Advocacy, said: 'Using buy now pay later (BNPL) is an easy and convenient way to pay for millions. However, with currently little to no information or warnings about the risks of incurring late fees or getting into debt, it raises concerns that many shoppers do not fully understand the products they’re using.
'With the cost of living rising, appropriate affordability checks are needed to prevent people from building up debts they may struggle to repay. It is encouraging that the government has now set out plans to strengthen the regulation of interest-free BNPL credit agreements, but this must be urgently introduced to ensure users are properly protected.'
Before signing up for a BNPL scheme, it's important to ensure you know how it works and that it's the right option for you.
If you decide to use one, follow our steps for ensuring it's a smooth experience.