UK Government Cracks Down On Buy Now, Pay Later Companies

Just this week, the UK government announced new rules to help regulate the Buy Now Pay Later (BNPL) sector.

BNPL companies have grown massively in popularity over the last few years, allowing consumers to split purchase prices into smaller, interest free payments.

However, these programmes have largely gone unchecked for many years, meaning consumers are increasingly at risk of spiralling into debt.

Now, new rules could bring BNPL companies under governance of the UK’s Financial Conduct Authority (FCA), meaning tighter rules for them to follow.

What Does Buy Now Pay Later Mean?

Buy Now Pay Later (BNPL) is a short-term credit loan, that allows shoppers to buy goods but split the payment into smaller, interest-free chunks.

Some of the biggest BNPL players in the UK include Klarna, Clearpay and Zilch, which have been used by retailers and small businesses to help drive sales – especially during tough economic times.

And whilst BNPL is a great way to encourage spending, it has recently come under criticism for encouraging people to buy things they can’t afford – causing them to go into debt.

What Are the New Rules For Buy Now Pay Later?

Under the new rules, BNPL companies will have to carry out affordability checks to make sure borrowers are able to repay what they owe. These checks will likely follow a similar structure to other loans, which include looking at income, outgoings and other debts.

Consumers will also be more protected by being able to escalate complains to the Financial Ombudsman Service and be able to receive refunds faster.

Purchases through BNPL schemes will also fall under the Consumer Credit Act, meaning shoppers can make claims on purchases between £100 and £30,000 if items aren’t delivered as promised. This rule puts power back in the consumer’s hands – something which was not previously applied to BNPL purchases.

But most importantly, all BNPL companies will need to be more transparent around repayment terms, what happens if a buyer defaults and giving people financial advice. That way, shoppers know exactly what they are getting themselves in for, and what is expected of them when it comes to repayments.

Why Now?

BNPL companies have become hugely popular in recent years, especially as inflation has spun out of control in the UK.

In fact, according to government figures, over 11 million people in the UK used a BNPL service over the past year. More worryingly, data by the Financial Conduct Authority shows that usage of BNPL services has jumped by 2 million in the last three years, especially with single parents and women aged 25 to 34.

And whilst splitting one big cost into smaller payments sounds like a great deal, many argue that these services do not present as credit agreements, which is essentially what they are. This means it’s easy for consumers to find themselves with penalties, high bills to pay and growing debt.

How Are Experts Reacting?

Whilst some big BNPL companies like Klarna have supported better regulation, there’s no denying that it could impact small businesses that rely on BNPL to drive sales.

So, could these regulations help protect consumers? or do they simply stump growth?

Some experts weighed in…

Sam Riordan, Executive Director of Banking & Payments at Capco

“The introduction of formal regulation of Buy Now Pay Later (BNPL) offerings, following recommendations outlined in the Woolard Review, marks an important milestone in the evolution of consumer lending. Yesterday’s announcement signals a move to improve consumer protections, whilst continuing to support the innovation and enhanced customer experience that BNPL solutions provide.

“For consumers, the appeal of BNPL has always been clear: simple transparent pricing, flexible repayment options, and frictionless experiences at checkout. But this ease has come at a cost – many users are unaware that certain BNPL products constitute a credit agreement, or the consequences of late and missed payments. The regulation brings into focus stronger affordability checks, taking into consideration other credit products that a consumer may already hold, and clearer communications and disclosures, helping consumers make more informed choices. The challenge will be ensuring this doesn’t erode the core experience that has driven BNPL’s popularity.

“It also represents a shift in the competitive landscape, increasing the regulatory hurdle which pioneering innovators will now need to meet, and perhaps encourage stronger market participation from traditional credit providers who now need to re-imagine how they support changing customer needs through increased choice and transparency.

“Many BNPL firms will already have plans underway: developing more robust and exhaustive affordability checks, enhancing refunds and dispute management processes, and embedding new expertise for complaints submitted to the Financial Ombudsman.

“This is a big step towards enhancing consumer protections for a fast-growing product, that has attracted millions of consumers across the UK due to its seamless checkout experience and customer centric flexibility. The balance will need to be struck between strengthening the regulators controls over a new part of the market and ensuring customers choice and experience remains at the heart of these innovators business models.”

Charles Rogers, Senior Financial Services Solicitor at Law Firm Harper James

“The government’s move to bring Buy Now Pay Later (BNPL) products offered by third-party lenders within the scope of regulation is a much-needed step forward. These services have grown rapidly in popularity, especially among younger generations of consumers. But this growth may have outpaced consumer awareness and regulatory oversight, leading to significant risks for users who may not fully understand the financial commitments they are entering into and the potential for late payment fees.

“Until now, BNPL providers have not been required to conduct affordability checks, and the terms of these credit agreements have not always been clear. This has left consumers exposed to potentially unaffordable debt, with limited access to redress when things go wrong. The new regime aims to correct that by allowing the FCA to apply consistent standards across the sector for third party lenders.

“Requiring upfront affordability checks will help prevent people from taking on more than they can manage. Faster access to refunds and the ability to escalate complaints to the Financial Ombudsman will bring third party BNPL more in line with other forms of regulated credit. These protections will make a real difference for consumers, especially those who may be financially vulnerable.

“At the same time, this change gives the industry the clarity it needs to innovate responsibly. BNPL agreements offered by merchants directly will maintain access to the exemption. Credit brokers (except for domestic premises suppliers) will not require authorisation to continue arranging currently exempt BNPL agreements. Regulation does not have to stifle progress – in fact, it often provides the foundation for sustainable growth. Firms that embrace the new regime will be better positioned to build trust with their customers and to offer products that genuinely support financial wellbeing.”

“This legislation is a welcome development that balances consumer protection with commercial opportunity. It will help ensure BNPL is used as a tool for flexibility and convenience, rather than becoming a source of increased debt and reduced creditworthiness.”

George Holmes, Business Finance Expert and Managing Director at Aurora Capital

“New regulation for BNPL is long overdue. It’s a positive step for consumer protection, but small businesses will feel the impact too, especially those that rely on BNPL at checkout to boost sales and cash flow.

“Tighter rules will almost certainly mean more friction at the checkout and possibly lower approval rates. For small retailers and service providers already battling slowing demand and rising costs, any dip in conversions could hit hard.

“Many don’t have the same negotiating power or tech support as large brands when working with BNPL providers, so they’ll need clear guidance on how to stay compliant.

“The goal here is definitely right: stop unaffordable borrowing and protect consumers. But we also need to support the small businesses on the other side of the transaction. Without the right tools and education, they risk being left behind in a space that’s rapidly becoming more complex to navigate.”

The Future of BNPL

Ultimately, the crackdown on BNPL companies is intended to protect consumers, which can only be seen as a good thing. However, other have wondered how this move will affect small businesses and other products in the UK’s Fintech sector.

It will be interesting to see how businesses respond, but for now, we’ll be  watching closely to see how the move affects spending habits in the UK and beyond.