Industry urges UK government to "move quicker" as proposals to tighten buy now, pay later rules outlined

Buy now, pay later players have broadly welcomed government proposals announced today to tighten regulation of the buy now, pay later sector but have urged the government to “move quicker” to introduce new rules.

The Treasury said its new proposals will protect “millions of people” amid a steep rise in the popularity of buy, now, pay later as an alternative form of credit in the UK.

Under the proposals, lenders will be required to undertake “affordability checks”, making sure loans are affordable for consumers, while rules will also be amended to ensure advertisements are fair, clear and not misleading.

The Treasury also said buy now, pay later providers will have to be FCA-approved and borrowers will be able to make a complaint to the Financial Ombudsman Service.

Economic secretary to the Treasury John Glen said: "Buy now pay later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place.

"By holding buy now pay later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK."

The proposals, which will also apply to other forms of short-term debt, follow a government consultation of buy now, pay later rules which ran from October 2021 to January this year.

The government will next publish a consultation on draft legation towards the end of the year, with the aim of introducing secondary legislation in the middle of 2023. After this, the FCA would consult on rules for the sector.

The new rules come amid concerns from some that users don’t understand the buy now, pay later model and it encourages users to get into debt who can't afford it.

Buy now, pay later firms have also come under fire from the advertising regulator, the Advertising Standards Authority (ASA), for irresponsible advertising.

In 2020, the regulator banned four Klarna ads, which it said were reckless as they linked Karma’s buy now, pay later service with “lifting or bossing mood”.

In light of the absence of current rules, some players, like Klarna and Laybuy, have started voluntarily providing information to UK credit agencies.

Industry response

Responding to the proposals, Klarna said it welcomed them but urged the government to act quicker to introduce new rules.

Alex Marsh, head of Klarna UK, said: “As a licensed European bank with many years’ experience providing regulated credit products in the UK, we welcome HM Treasury’s BNPL regulation announcement as it will raise standards and consumer protections across the sector. 

“We urge the government to move quicker than planned to implement regulation which gives additional protections to consumers from both irresponsible, unregulated BNPL providers and traditional banks disguising high interest products as ‘BNPL’.

“At Klarna, we have not waited for BNPL regulation. We make it clear in our marketing that BNPL is credit, we check consumers’ ability to repay on each transaction, and we now share data with UK credit reference agencies to increase visibility of BNPL use across lenders.

“As the UK’s largest BNPL provider, we will continue working closely with HM Treasury and the FCA to accelerate progress and make future regulation of the highest possible standard globally.”

Gary Rohloff, Co-founder and managing director of Laybuy said: “We have always been in favour of a proportionate model of regulation, one that reflects the low risk of BNPL, supports small e-commerce businesses and sets high standards across the industry.

“Since we started Laybuy, we have always set out to be the most responsible BNPL lender. That means working with credit reference agencies and conducting creditworthiness checks on all our customers. It’s a real endorsement of our model that the Government agrees that this should be taken forward across the industry.

“Naturally, we need to have a look at the consultation response in full, but we’re supportive of the Government’s approach and we look forward to working closely with the FCA on the next steps.”

PJ Bryne, CEO of the UK and Ireland at buy now, pay later provider humm group said: “It is great to see innovation that is helping to bring new consumer products to the market, but it’s important that safeguards are in place to protect the most vulnerable. 

“As a leading consumer finance and BNPL provider in Australasia, we entered the UK market through a regulated route and achieved FCA regulatory approval in February 2022.

“The key step will be making sure that the industry conducts proper affordability checks and shares data with credit reference agencies. 

“At the moment, as not all BNPLs share data, there is not a full picture on credit activity for all potential customers. This should help ensure a high minimum standard.”

Kieran Hines, a fintech analyst with Celent, said: “It won't come as a surprise to many to hear that the government is considering legislation around BNPL products, given the rapid growth in the sector.

“It remains to be seen what will happen following the consultation of course, but this could certainly lead to changes in the way customers experience the product in the future.

Martin Lewis, the founder of Money Saving Expert, said he welcomed the proposals but pointed out the “painfully slow” process of introducing new rules across the sector.

The Coalition for a Digital Economy (Coadec), an independent advocacy group which campaigns for Britain’s technology-led startups and scaleups, said the proposals were not “robust” and not “proportionate” to protect consumers and innovation.

Charlie Mercer, head of economic policy at Coadec, said: “It’s been a long time coming and the Treasury's response is welcome. 

“At Coadec we wanted to see regulation that was robust and proportionate to protect consumers and innovation alike. We’re unconvinced that the framework outlined today fits this criteria.

“On the one hand the response outlines clear direction for pre-contractual information, credit worthiness and forbearance, which will all sit under the FCA’s proportionate and outcomes-focused rulebook.

“On the other hand, HMT has opted for a pick and choose approach to the CCA (Consumer Credit Act), which, in the words of the Economic Secretary to the Treasury John Glen, ‘needs to be reformed to keep pace with the modern world’. This risks building vital regulation on sand.

“It is also vital that institutions of the old consumer credit regime that will now formally touch BNPL, like the Credit Risk Agencies and the Financial Ombudsman Service, modernise to ensure that consumers are protected from harm, but can also utilise the benefits of innovation and value that BNPL offers.”