Firms which offer buy-now-pay-later (BNPL) financial products are set to be held to higher standards after the Treasury confirmed plans to regulate the growing sector.
An eight-week consultation has been launched to examine whether and how BNPL firms would be regulated by the Financial Conduct Authority by 2024 and with new requirements for companies to carry out effective affordability checks on customers.
BNPL products allow customers to split the cost of goods into regular interest-free payments, often being offered online by third-party companies, such as Klarna, Clearpay and Layby.
According to a Citizens Advice survey, 41% of 2,700 respondents who had used BNPL services had struggled to make payments at some point, fuelling fears that the products could land users in debt.
Under the new regulation, customers would be given greater protection and could raise any concerns about BNPL providers to the financial ombudsman.
Calls for BNPL firms to be placed under greater regulation have come from financial commentators, including Martin Lewis, and Labour MP Stella Creasy, who warned, "we cannot let these predatory firms have another year to profit off people struggling".
The BNPL boomed during the pandemic, almost quadrupling to £2.7bn in 2020 as customers took to online shopping, and has seen continued growth as people are squeezed by the heightened cost of living, according to the Centre for Financial Capability.
This “will have a huge impact on the market, not just for the major players but for retailers too,” said Jonathan Herbst, financial services head at Norton Rose Fulbright law firm.
“The big question is really how the major players will adapt their systems and controls to the licensing requirements and demands of this new ‘proportionate’ regulatory framework,” added Mathew Gregory, a partner at the firm.