Klarna campaign. Courtesy.
Britain will introduce rules for buy-now pay-later (BNPL) credit after the unregulated market surged during the coronavirus pandemic lockdown, the UK’s finance ministry said on Tuesday.
BNPL are interest-free short-term loans that spread the payment for retail goods, and are often used as an alternative to credit cards.
“Buy-now-pay-later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular,” financial services minister John Glen said in a statement.
Legislation will be brought in as soon as parliamentary time allows to require providers to make affordability checks before lending to a customer, he said.
“By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford — the same protections you’d expect with other loans.”
Glen was responding to a review on the unsecured credit market by former Financial Conduct Authority interim chief executive Christopher Woolard that was also published on Tuesday.
BNPL products nearly quadrupled in 2020 and now total £2.7 billion, with 5 million people using these products since the beginning of the pandemic, the review said.
The rapid increase in popularity is partly due to the pandemic encouraging more people to shop online. More than one in 10 customers of a major bank using BNPL were already in arrears, it said.
“The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm,” the review added.
Britain is following Australia, where the BNPL industry is also growing rapidly. Firms in Australia are set to be subject to tighter rules on how the products are designed and distributed later this year, whilst the government is conducting a wider review into payments regulation.
Klarna, which offers BNPL products in Britain, said it was “very comfortable” operating in a regulated environment.
“We agree that regulation has not kept pace with new products and changes in consumer behaviour,” Klarna said.
Woolard’s review also recommended funding free advice for people struggling to manage their debts as demand increases to as many as 1.5 million additional cases following the pandemic.
The review recommended that the FCA, Bank of England and government reform rules on credit unions to encourage mainstream lenders into this area to provide alternatives to high-cost credit, the review said.
By Huw Jones; editors: Sinead Cruise and David Evans.