The government has announced plans to regulate the ‘Wild West’ of payment plans offered by firms like Klarna and Clearpay.
Such ‘Buy-Now Pay-Later’ (BNPL) firms only became available in the last 10 years, and it has taken until now for the laws around them to catch up.
Although they are a form of lending, like the use of credit cards, there are far fewer rules about their use.
This is set to change from next year, as part of reforms which will also give shoppers more rights.
Typically used for smaller transactions, such as clothes bought online, BNPL buys can nevertheless add up to significant amounts if used for many things.
Those who take on too much and can’t pay risk getting a black mark on their credit file, as well as racking up unaffordable debt.
Over 11 million people in the UK use Klarna alone, which is available as a payment option with 60,000 sellers including John Lewis, Argos, eBay and Eurostar.
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If they want to continue, they will now have to accept mandatory checks to make sure they can repay what they borrow.
Klarna already voluntarily uses soft credit checks, which do not leave a mark on the user’s file if unsuccessful.
Under the new rules, they may be required to take more into account, such as current outgoings as well as credit history.
Klarna say that they help people avoid damaging debt, claiming to have ‘helped shoppers avoid nearly half a billion pounds in interest by offering a simpler, fairer alternative to credit cards’.
They said the average outstanding BNPL balance was £150 compared with £1,295 for credit cards.
Another key BNPL operator, Clearpay, said they welcomed the changes and thought they could lead to more shoppers using them.
A spokesperson for the company said legislation would ‘create a more sustainable foundation for the future of BNPL as it continues to grow as an everyday payment option for consumers’.
What else do the changes include?
The government says customers will get fairer and faster access to refunds, as well as the right to complain to the Financial Ombudsman — bringing BNPL in line with other credit products.
Clearer information must be provided when people agree to use these products.
Emma Reynolds, economic Secretary to the Treasury, said: ‘Buy-Now, Pay-Later has transformed shopping for millions, but for too long has operated as a wild west – leaving consumers exposed.
‘These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow, and create jobs through our Plan for Change.
‘The announcement is backed by brand new reforms to the Consumer Credit Act — which will replace a 50-year-old regime with a modern, pro-growth framework that reflects how people borrow today.’
‘Unaffordable debt from a BNPL sector’
Tom MacInnes, director of policy at Citizens Advice, said: ‘For too long, people have been exposed to unaffordable debt from a BNPL sector that has operated in a regulatory area.
”For some time, this has had dire consequences. Many people are struggling to repay credit they can’t afford, falling behind on essential bills and often needing emergency support, like food bank vouchers.’
He added that this was ‘not the end of the road’, and urged the FCA to ‘act swiftly to set out the strong consumer safeguards that are so urgently required’.
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