How will the government’s plans to tighten up buy now pay later loans affect retail?

On Monday, the UK Government announced that they plan to strengthen the regulations on buy now pay later (BNPL) loans, following a consultation that closed in January.

The UK Government laid out various new proposals, such as requiring lenders to ensure loans are affordable by carrying out affordability checks, with lenders also needing to be approved by the Financial Conduct Authority (FCA).

Rules ensuring that advertisements are fair, clear and not misleading will also be implemented, with the new regulations also applying to other forms of short-term credit.

Those who are issued short-term credit will also be able to take a complaint to the Financial Ombudsman Service (FOS).

Economic Secretary to the Treasury, John Glen said: “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. 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.”

In 2021, 15 million people in the UK took out a BNPL loan, which is typically paid over several interest-free installments. However, BNPL providers make money from retailers, usually by taking a cut from sales, whilst there may be additional charges if customers miss payments.

A recent survey by Citizens Advice found that in March, young people, people in debt and people claiming Universal Credit were at least two times as likely to have used BNPL to cover essentials such as food and toiletries, than other groups.

With inflation hitting 9% and the cost of living crisis worsening, more people might come to rely on BNPL loans in order to purchase essentials in the near future. However, it will be interesting to see what effect stricter regulations will have on people’s ability to utilise BNPL and other short-term forms of credit. Will regulation protect those on a lower-income, or will it prevent them from purchasing the essentials they need to survive?

Industry reaction

Adam Kirkby, Head of Sales, etika, comments: “etika welcomes this announcement from the government today. As an organization we’ve always believed in providing customers with ethical, fair, affordable lending options, which is why we have always operated under existing FCA regulations – a higher standard than other BNPL providers on the market.

“This is a wake-up call for the BNPL market. The new rules are an opportunity to build better standards and drive safer growth for this innovative market that retailers and customers have come to rely on.”