Millions of shoppers using BNPL services will be better protected by new rules that have now come into force.
The government says they deliver on its commitment ‘to end the Buy Now, Pay Later Wild-West’.
Buying items with providers like Klarna, PayPal or Clearpay can be a useful tool to help people manage their finances, allowing consumers to spread the cost of purchases interest-free, typically at the point of online checkout.
However these users have had fewer rights than someone buying the same item with a credit card or a personal loan when seeking a refund after buying faulty goods.
These products will now be regulated by the Financial Conduct Authority (FCA), giving consumers protections in line with other forms of credit.
Under the new rules, providers must also carry out affordability checks before offering credit, meaning no one should be borrowing what they cannot realistically afford to repay, helping people avoid getting into avoidable, unaffordable debt.
And anyone who falls into financial difficulty will be directed towards debt advice and support first, rather than being immediately handed to a debt collector.
Rachel Blake, Economic Secretary to the Treasury, said: “We made a clear promise to give consumers the protections they deserve and today we are delivering.
“It is not fair that people using these products have had fewer rights than if they had paid by credit card. These new rules protect the consumer — with proper checks before credit is offered, real rights when things go wrong, and support rather than pressure if someone falls into financial difficulty.”
Martin Lewis, founder of MoneySavingExpert.com, said: “Buy Now Pay Later done right, isn’t wrong. It’s fine for those who understand what they’re doing and make an active, one-off decision to use it to spread the cost over a few months interest-free.
“Yet too many don’t do that. They fall for BNPL’s ubiquity, use it constantly and build up a bank of unaffordable debt. Worse, not everyone knows it’s a debt.
“That is why it has been unsafe for some, and why I was one of those who campaigned strongly for the government to bring in this regulation, and why I’m delighted to see it happening now.
“Most people won’t notice any difference. These changes are primarily to ensure BNPL is sold responsibly and that there are protections for when things go wrong, which can be hugely damaging.
“These protections importantly include being able to appeal to the independent, free Financial Ombudsman Service over problems such as if your credit file is wrongly marked, or if BNPL has been mis-sold rather than properly explained as a debt.”
Rocio Concha, director of policy and advocacy at Which?, which campaigned for the changes, said: “It’s great news that this is finally happening and means users of these services will benefit from stronger safeguards.
“Key changes include access to the Financial Ombudsman Service if something goes wrong, as well as clearer information at checkout and affordability checks to help prevent people from taking on debt they can’t afford.”
Vikki Brownridge, CEO at StepChange Debt Charity, said: “Whilst BNPL can be a useful tool for spreading the cost of large expenses – our insight tells us those who use it are much more likely to be experiencing debt problems, putting them at risk of harm.
“Following years of campaigning by StepChange and others across the sector, we welcome these new consumer protections. Bringing BNPL products into line with other consumer credit products is an important step that will give borrowers stronger safeguards and greater confidence.”
Alison Walters, director of consumer finance at the FCA, said: “Consumers will benefit from affordability checks, clearer information, and greater support if they get into difficulty.
“Our regulation will make sure people can continue to benefit from this type of borrowing; have the information they need to make informed decisions and the protections to help avoid unmanageable debt.”
Lilly Aaron, senior policy manager and Buy Now Pay Later lead at the Money and Pensions Service, said: “As with any other form of credit, when using Buy Now Pay Later, consumers should always check they can comfortably afford the repayments, avoid taking on multiple agreements they may struggle to keep track of, and make sure they are aware of when payments are due.”