'Buy now, pay later' regulation: 6 things you need to know about the plans

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 regulate the BNPL sector in 2021, 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.

1. BNPL schemes will have to check if you can afford the debt

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. 

Klarna started reporting BNPL borrowing to credit reference agencies in June, in a bid to improve the visibility of shoppers' debt, but many other BNPL lenders haven't followed suit which means it could have limited effect.

Which? has been calling for better affordability checks after we found families and those who are facing financially challenging times are more likely to use BNPL services and many BNPL users do not think they're taking on debt when deciding to pay later at the checkout.

With the cost of living on the rise, the urgent introduction of robust affordability checks is key to protecting consumers from spiralling debt.

2. Ads must be fair, clear and not misleading

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.

Which? has raised concerns around how BNPL providers and retailers promote 'pay later' products in the past, including JD Sports' promotions which incentivise shoppers to use BNPL schemes in exchange for free delivery.

• Find out more: Zilch advertises BNPL credit for groceries and takeaways

3. BNPL shoppers will be able to complain to the FOS

If something goes wrong with your BNPL repayments, you can't currently take your complaint further than the BNPL scheme itself.

Under the government's plans for regulation, BNPL shoppers will also be able to take their complaints to the Financial Ombudsman Service (FOS).

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.

• Had a problem with a BNPL scheme? You can share your experience using our BNPL complaints form.

4. Section 75 protection should apply to BNPL transactions

The government's view is also that Section 75 protection should apply for BNPL transactions for goods that cost between £100 and £30,000 (as is the threshold with all other credit products).

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.

• Find out more: what is Section 75?

5. It's not just firms like Klarna that will have to change

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.

6. The changes could take a while to come into force

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.'

• Find out more: online shoppers bombarded with BNPL schemes

How to shop safely with BNPL schemes

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.

• Set up alerts for repayments - in your diary or on your phone so you know exactly what to pay back and when. This is particularly useful if you have a number of different repayments to make.
• Draw up a budget - so you know how much money you're paying back each month, and how much money you can spend. Don't be tempted to spend more to max your credit limit and make sure you'll be able to repay the amount within the agreed timeframe.
• Don't overextend your other borrowing - think carefully about whether you'll be able to meet current BNPL repayments before applying for credit from other providers.
• Make any returns promptly - so you don't end up making repayments for something that you want to send back. We've heard from some BNPL users that refunds can take longer to process if you've paid with a pay later scheme - so it's worth sending your items back asap.
• Contact the BNPL scheme if you think you might miss a repayment - some schemes allow you to snooze or freeze repayments.