The government on Tuesday will unveil long-awaited plans to regulate ‘buy now, pay later’ firms as it promises to end ‘unlimited borrowing’.
The Treasury said the new rules would protect up to 10 million people from “financial harm”.
Lenders need to do better scrutiny of borrower affordability and provide clearer information about loans.
Customers can also submit complaints about companies to the Financial Ombudsman.
Buy now, pay later products allow consumers to pay for goods in installments, usually interest-free.
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But while they’ve gained popularity, particularly among young people, they remain largely unregulated, raising concerns about people getting into debt.
Users are also not entitled to a breather if they cannot afford a refund or compensation if something goes wrong.
The government initially promised to regulate the sector in 2021 and has been “excruciatingly slow” at tabling legislation, according to consumer advocate Martin Lewis.
Last February, the Financial Conduct Authority (FCA) ordered the four largest buy-now pay later operators – Clearpay, Klarna, Laybuy and Openpay – to change their contracts after identifying potential harm to customers.
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However, in the absence of specific legislation, it had to resort to consumer rights.
Under the new plans, the FCA would be given powers to crack down on companies that break the rules, including banning them from making any further loans. Firms would also need to be licensed by the FCA and would face stricter rules when promoting their products.
The plans will be published in a consultation paper by the Treasury Department on Tuesday and are expected to come into effect before the end of 2023.
“People should have access to affordable credit but with clear safeguards,” said Finance Minister Andrew Griffith.
The UK buy-now pay later sector has nearly quadrupled to £2.7bn in 2020 during the pandemic.
Recent research by the Center For Financial Capability, a financial education charity, shows that people of all ages are now turning to the sector as they struggle with the cost of living, showing the need for urgent regulation.
A recent Citizens Advice survey found 2,288 people who had used Buy Now Pay Later in the last 12 months.
It found that 52% made repayments from their checking account, but 23% used a credit card, 9% used a bank overdraft, and 7% used a loan from friends and family.
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