Buy-now, pay-later (BNPL) companies in the UK will need to provide affordability checks and ensure that advertisements are fair and clear, as part of measures to regulate the sector.
Lenders offering such products will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take complaints to the Financial Ombudsman Service.
BNPL, which has been unregulated, has rapidly becoming a popular way for consumers to spread payments for retail goods such as clothing through interest-free short-term loans.
Joining specialists Klarna, various companies from banks to tech giants such as Apple have poured into the market over the past two years, competing with each other to offer shoppers interest-free instalments for small items.
HM Treasury said on Monday it is tightening rules on BNPL loans to try to prevent consumers from taking on unmanageable debts.
A draft legislation consultation will be published towards the end of 2022 with the aim of secondary legislation being laid down in mid-2023, after which the FCA will consult on its rules for the sector.
"Buy-now, pay-later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place," said John Glen, economic secretary to the finance ministry, in a statement.
"By holding buy now, pay later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK."
Amid inflation hitting a 40-year high, last week the FCA encouraged UK lenders and consumer credit companies to provide more support to those struggling, suggesting banks should put in place similar measures that were recommended during the pandemic, including debt help and "tailored forbearance" such as loosening repayment rules on borrowed funds.