Buy-now pay-later firms face clampdown under new rules

The government has revealed long-awaited plans to regulate "buy-now pay-later" firms, as it vows to stop "unconstrained borrowing".

The Treasury said the new rules would protect up to 10 million people from being "exposed to financial harm".

Lenders will have to do better affordability checks on borrowers and offer clearer information on loans.

Customers will also be able to take complaints about companies to the Financial Ombudsman.

Buy-now pay-later products allow consumers to pay for goods in instalments, typically interest free.

• How does buy now pay later work?

But while they have surged in popularity, particularly among young people, they remain largely unregulated, raising concerns about people falling into debt.

Users are also not entitled to any breathing space when they cannot afford to repay, or compensation if things go wrong.

'Painfully slow'

The government first promised to regulate the sector in 2021, and has been "painfully slow" in bringing legislation forward, according to consumer champion Martin Lewis.

Last February, the Financial Conduct Authority (FCA) told the four biggest buy-now pay-later operators - Clearpay, Klarna, Laybuy and Openpay - to change their contracts after identifying potential harm to customers.

• Warning over buy-now pay-later social-media posts

But it had to use consumer rights law in the absence of specific legislation.

Under the new plans, the FCA would be given powers to clamp down on firms who break the rules, including banning them from further lending. Firms would also have to be licensed by the FCA and would face tougher rules when advertising their products.

The government is now consulting on the new draft rules.

The plans have been published by the Treasury with an 11 April deadline for submissions. The proposals are expected to become law before the end of 2023.

The consultation has been a long time coming, said Matthew Upton, director of policy at Citizens Advice.

"Buy-now pay-later borrowing can be like quicksand - easy to slip into and very difficult to get out of," he said.

"Action is needed quickly. Every day without regulation is another day people are left unprotected."

The boss of a British buy-now pay-later firm told the BBC's Today programme that regulation of the sector was long overdue.

Philip Belamant of Zilch said that customers do not currently enjoy the protections of what you would typically see in a normal debt product.

"Customers need to have the ability to complain to the Ombudsman, they need protection if they find themselves struggling to repay," he said.

He said short-term lenders should do an affordability and credit check on customers - which Zilch says it already does - and at the same time report the activity so borrowers cannot simply get another loan elsewhere and get further into debt.

Growing sector

"People should be able to access affordable credit, but with clear protections in place," said Financial Services Minister Andrew Griffith.

Britain's buy-now pay-later sector nearly quadrupled in size during the pandemic in 2020 to £2.7bn.

Recent research from the Centre For Financial Capability, a financial education charity, said people of all ages were now turning to the sector as they struggled with the cost of living, showing the need for urgent regulation.

A recent survey by Citizens Advice heard from 2,288 people who had used buy now pay later during the previous 12 months.

It found that 52% made repayments from their current account, but 23% used a credit card, 9% used a bank overdraft and 7% borrowed from friends and family.

Many borrowers do not realise they are taking on debt when using buy now pay later so the regulation should be introduced as soon as possible, said Rocio Concha, director of policy and advocacy at consumer group Which?.

"The government must ensure there are no delays to introducing these changes and that consumers are given stronger safeguards to protect them and warn about the risks of using buy-now pay-later schemes," she said.