UK Government sets out plans to regulate Buy-Now-Pay-Later

The Treasury published plans on 20 June 2022 to regulate buy now pay later (BNPL) schemes, such as Klarna and Clearpay, bringing short-term interest-free credit under the Financial Conduct Authority¹. The Treasury first announced its intention to regulate the sector in 2021, and the June 2022 outline followed its consultation¹.

Under the proposals, BNPL lenders would need approval from the FCA before offering products to shoppers, and would be required to carry out affordability checks to ensure lending is responsible¹. At present there is no consistency in how firms judge affordability: some run soft credit checks, while others such as Clearpay run none and instead start customers on a low limit that rises with repayments¹. Klarna began reporting BNPL borrowing to credit reference agencies in June 2022, but many other lenders have not followed, which limits the effect¹.

The plans also cover advertising, complaints and purchase protection. Financial promotion rules would be amended so BNPL ads are fair, clear and not misleading, with retailer promotions approved by an authorised person, which could be the BNPL firm¹. BNPL shoppers would be able to take complaints to the Financial Ombudsman Service, which is not currently available to them¹. The government's view is that Section 75 protection should apply to BNPL transactions for goods costing between £100 and £30,000, the same threshold as other credit products, although many BNPL orders fall below £100¹. Other forms of short-term interest-free credit, such as for dental work or furniture, would also have to comply¹.

The Scottish Parliament's Social Justice and Social Security Committee, in a report published on 2 July 2022, noted the UK Government's aim of having secondary legislation in place by mid-2023 and said regulation should be introduced quickly².

Why it matters for households

BNPL is a form of credit that lets people spread payments across instalments or pay later, interest-free, and it is currently not regulated by the FCA, unlike more traditional credit¹. The committee heard that people use high interest credit and BNPL to delay or split the cost of essential items such as food, and said it remained concerned that uptake would grow with inflation, leading to future debt². The committee also heard that over 600,000 people were over indebted in Scotland, 150,000 people sought debt advice, and more than 60,000 people in Scotland had either got into debt for the first time or seen existing debts worsen². In April 2022, CPI inflation rose to 9%, a 40-year high².

The changes would affect anyone using BNPL, and firms offering it, but not until the legislation is in place. Until then, BNPL users have no FCA protection, no Ombudsman route and no Section 75 cover on BNPL purchases¹. The committee said many more people could suffer harm with no recourse before mid-2023².

What happens next

Draft legislation is to be published towards the end of 2022, followed by secondary legislation by mid-2023, after which the FCA will run a consultation¹. The Scottish committee's report was due to be published in September 2022².