MSE News

Buy now pay later regulation confirmed - but Martin Lewis warns that action is 'far too slow'


Plans on how buy now, pay later services will be regulated have today (20 June) been announced by the Government. But (MSE) founder Martin Lewis warns that legislation is taking "far too long" to take force with borrowers being left unprotected during the cost of living crisis. 

Today's announcement from the Government is in response to a 2021 consultation on the topic and comes over a year after it originally said it would regulate the buy now, pay later (BNPL) industry. In its response, which we've explained in more detail below, the Government said it plans to draft legislation to regulate BNPL firms towards the end of this year.

But the new rules are unlikely to take force until late 2023 at the earliest because regulator the Financial Conduct Authority (FCA) will also need to consult on the proposals from the middle of next year. 

With BNPL, instead of paying at the till or online checkout, the BNPL firm pays the retailer for you. You then agree to pay the BNPL firm back over a few weeks or months, meaning you can spread your shopping costs. It's interest-free and fee-free but miss a repayment and you risk being charged late fees.

See our Buy now, pay later guide for how it works and what to look out for.

'I'm frustrated by how long it's taking to regulate'

Martin Lewis, founder of (MSE) said: "Buy now, pay later (BNPL) regulation is desperately needed, so my pleasure that it’s finally to happen is tempered by frustration at how long it is taking.

"It’s now nearly two years since we raised the alarm about BNPL’s explosive growth and called for urgent regulation to ensure proper checks are in place, and that people can go to the Financial Ombudsman when there are problems. Yet those protections still won’t be in place for the financially bleak winter coming.

"Buy now, pay later is often insidiously marketed as a simple payment option, or worse, a lifestyle choice. It’s not. It’s a debt, with all the dangers of debts. It perverts purchasing decision-making, leaving many in a continuous loop of owe-owe-owe. Firms make money from it because people transact more via BNPL than they would otherwise. 

"Debt shouldn’t be something you slip into, it must be an informed, active, conscientious choice. While in some cases BNPL can be a legitimately cheap way to spread the cost, amidst a cost of living crisis, people should always first ask themselves: ‘if I can’t afford to pay for it now, how will I afford to pay for it next month?'"

What the proposed rules could mean for consumers

The Government says it expects the new rules will require that:

  • Consumers face tougher affordability checks. Currently, most major BNPL lenders, including Clearpay, Klarna and Laybuy, opt for 'soft' credit checks to judge your ability to repay before agreeing to lend - this means you won't see a mark on your credit file. In future, it's expected that firms will have to undertake 'hard' credit checks to assess customer affordability, which'll leave a mark on credit files and could impact your ability to get credit elsewhere.

    It is, however, worth pointing out that Klarna this month opted to report customer data to credit reference agencies' Experian and TransUnion, which means your BNPL habits can already be looked at by other lenders.  
  • Lenders ensure advertising isn't misleading. Firms such as Clearpay, Klarna and Laybuy will be required to follow new advertising rules which will ensure that BNPL advertisements aren't misleading. They will also need to be clear that BNPL is a form of credit. 
  • The FCA make sure the new rules are being met by BNPL firms. Lenders offering the service will need to be approved by the FCA in order to lend. 
  • Consumers can complain to the Financial Ombudsman Service (FOS). Currently, the only way for most consumers to complain about BNPL firms is directly to the firm itself. However, the new legislation is designed to give consumers increased protections by enabling complaints to be taken to the FOS if the lender has failed to respond or if complainants are unhappy with the response they do get. This change will mean complaints procedures for BNPL firms become aligned with those of traditional lenders. 

Right now traditional forms of credit still offer better protection than BNPL

BNPL is a form of credit, so it makes sense to consider whether BNPL or a more traditional form of credit, such as a 0% credit card or 0% overdraft, is better for you. Check out our Best 0% Credit Cards guide and our Top Current Accounts guide, if you're overdrawn, for a full break down.

If you choose to borrow through unregulated BNPL firms you'll be forfeiting any Section 75 Protection and a right to complain to the Financial Ombudsman. You'll also have a much shorter repayment window than if you were to borrow through a credit card or overdraft.

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