Buy now pay later (BNPL) borrowing can be like slipping into quicksand, a charity has warned, as the Treasury launched a consultation into bringing the sector under regulation.
Products allow shoppers to split payments at checkouts interest-free and they are offered widely online, often by fashion retailers.
But the Woolard Review, published in February, identified areas of potential consumer detriment as the market grows, including poor consumer understanding of products, a lack of affordability assessments and inconsistent treatment of people in financial difficulty.
There are also concerns about the potential to create high levels of indebtedness with some people making multiple BNPL purchases.
The Woolard Review recommended that BNPL be brought within the scope of Financial Conduct Authority (FCA) regulation and, alongside this, the Government announced its intention to regulate.
The Treasury said on Thursday that the consultation “sets out policy options to achieve a proportionate approach to regulation of BNPL”.
Matthew Upton, director of policy at Citizens Advice, said: “Buy now pay later borrowing can be like quicksand – easy to slip into and very difficult to get out of.
“Split payments are offered as a temptation at the checkout, but the consequences can be devastating for those who are least able to deal with them.
“We’ve helped many who have slipped into trouble, including one sent a debt collection letter over a £10 purchase. Another relies on buy now pay later to buy things such as their children’s school uniform, but cannot afford the repayments.
“Over half of young people who have used buy now pay later in the last year struggled to make a repayment.”
More than one in 10 (11%) of consumers are thought to have used a BNPL product since the start of the coronavirus pandemic.
The total value of BNPL transactions between January to December 2020 has been put at £2.7 billion, a figure which is expected to grow rapidly in the next few years.
Martin Lewis, founder of MoneySavingExpert.com, said: “BNPL isn’t automatically a bad thing to do. Done right, used right, it’s interest-free, and can be a useful tool to help people spread costs.
“However, what’s most telling is it is sold to retailers as an easy way to get people to spend more – this, combined with the fact it is most popular amongst younger adults, is a big red flag. So it is vital to get this regulation right.
“The strongest parts of the proposal are those which suggest you will be able to take BNPL firms to the Financial Ombudsman if things go wrong – a crucial protection – and the possibility of extending the Section 75 protections that apply to credit cards to BNPL. These changes are vitally needed.
“However, I think more flesh on the bones is needed on the plans to tackle problems with the design and marketing of BNPL.”
The consultation said: “There is always a balance to be struck to ensure that consumers are given appropriate protections without unduly limiting the availability and cost of useful financial products.”
It said that consumers should be adequately and fairly protected from detriment, and be able to access dispute resolution regarding the conduct of lenders.
The Government is seeking views on where it should draw the boundary for regulation of BNPL products, also bearing in mind other types of short-term credit.
It also wants to know whether people believe current requirements on BNPL merchants and lenders around advertising and promotion are sufficient.
Concerns have also been raised about inconsistencies with how BNPL agreements are reported on people’s credit files.
Because BNPL is not regulated by the FCA, there is no obligation for providers to conduct creditworthiness assessments as part of taking on new customers or when entering into individual agreements, the consultation document said.
The Government wants to hear views on the role of creditworthiness assessments as part of a proportionate approach to regulation.
Peter Tutton, StepChange head of policy, research and public affairs, said: “We look forward to contributing our formal response to the consultation, but already we can see that the Government is taking seriously its promise to regulate the BNPL market, and recognise that BNPL is credit, which has the potential to cause harm without adequate consumer protections.
“Where there are some important choices to be made – such as how widely the definition of BNPL should be drawn, and what the regulatory position of retailers should be – we would like to see the protection of consumers being the first and guiding principle of the final framework. We hope the introduction of regulation can be implemented at pace, given the rapid rise of BNPL.”
On Monday, Klarna chief executive Sebastian Siemiatkowski unveiled a new “pay now” option, introducing a more traditional form of payment into its product.
On Thursday, he said: “The launch of HM Treasury consultation is a welcome step forward, setting out plans for proportionate regulation that’s in the interest of consumers and encourages innovation.”
He added: “As the industry and consumer groups respond to this consultation, over the coming weeks we must all work to ensure these proposals are rigorous and effective. Done well, buy now pay later regulation will protect consumers, promote competition and choice, and position London as a world leader in fintech (financial technology) post-Brexit.”
Gary Rohloff, managing director and co-founder of BNPL provider Laybuy, said: “We have always welcomed proportionate regulation and have sought to create the highest standards across the sector…
“BNPL is becomingly increasingly popular and I think it is only right we seek the highest standards across the industry.”
A Clearpay spokeswoman said: “Consumer protections are at the core of our product, and we already go above and beyond many of the measures proposed by the Government…
“We note that the Government will work with the industry and credit reference agencies to identify an appropriate and workable solution to credit reporting, and look forward to demonstrating how on-time payment behaviour on Clearpay should be counted as a benefit to consumer credit scores.”
Consultation responses should be sent to firstname.lastname@example.org by January 6 2022.