The UK’s financial regulator is cracking down on “unfair” and “unclear” contracts for buy now pay later (BNPL) products as data reveals use of the alternative payment method has skyrocketed.
The Financial Conduct Authority (FCA) has enforced a requirement for firms in the BNPL sector to present customers with clear, easy-to-understand contracts that inform people of the financial risks that accompany use of the loan product.
The new enforcement has been made with the regulator’s existing powers under the Consumer Rights Act 2015.
The FCA has been keen to enforce stricter regulations on the alternative payment type that allows consumers to split the cost of purchases into regular payments.
Companies providing BNPL services including Britain’s Zilch and Sweden’s Klarna.
The government has yet to grant the FCA powers to regulate BNPL in the same way as other loan products, despite promises earlier this year. However, the regulator has decided to enforce stronger restrictions on BNPL firms within its current jurisdiction.
The FCA has long argued that the use of BNPL presents many of the same risks to consumers as any other loan product, despite not being subject to the same regulatory requirements. The recent surge in the cost of living has underlined these concerns.
Proposed new rules for the product include a requirement for firms to report the use of BNPL to credit reporting agencies, causing the service to be reflected on consumer credit ratings.
The FCA also wants firms offering BNPL to conduct credit checks for customers to determine if they are financial capable of taking on debt.
The government outlined a BNPL regulatory regime in February, but it was reported in July that the Treasury had become hesitant to go ahead with it over fears of market retaliation.
FCA chief executive Nikhil Rathi dismissed the concerns of a BNPL exodus following tighter regulation by saying the industry was largely in support of it.
Rising use of BNPL
The FCA, along with the contract announcement, has released data showing that use of BNPL in the UK in the six months prior to January increased by 17% to more than a quarter of adults, compared with the preceding 12 months in May 2022.
The data also revealed that consumers who have used BNPL more than 10 times in the past year were more than twice as likely to also have a high-cost credit product, almost twice as likely to have increased the amount of debt on credit products and were over four times as likely to have missed a payment of a bill or credit commitment in three of the last six months.
“When used appropriately, the product provides valuable benefits, but we want to ensure that consumers, particularly those in vulnerable circumstances, have adequate protections and are given sufficient information,” said Sheldon Mills, executive director of consumers and competition at the FCA.