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UK lays out regulation to police BNPL firms

Image credit: Tada Images via Shutterstock

The UK’s financial regulator is set to gain additional powers to regulate the buy now pay later (BNPL) sector under draft legislation unveiled by the government today.

The new rules would see BNPL providers – including Klarna, Zilch, and Clearpay – treated similarly to providers of other loan products.

Firms will have to conduct more robust affordability checks to determine if customers should be eligible for BNPL.

BNPL, a method of payment that breaks up the cost of purchases into smaller instalments, has soared in popularity before and during the rising cost of living.

Under the proposed rules the Financial Conduct Authority (FCA) would have the power to block firms from lending and remove their authorisation if they do not make sufficient credit checks.

The regulations outlined in the draft legislation have been widely expected by the UK’s BNPL industry, with some companies moving preemptively to bring their products in line.

The Treasury has been expected to publish its plan for some time, first outlining its proposal in June 2022.

Andrew Griffith, economic secretary to the Treasury, said: “People should be able to access affordable credit, but with clear protections in place. That is why these proposed regulations are so important.”

BNPL consumer protection

The FCA has been calling for tighter regulation of the sector since its review two years ago found considerable risks to consumers.

One survey found that nearly a third of 18-34-year-olds do not realise that they can get into debt using BNPL services.

The watchdog has already warned firms against misleading promotions of BNPL products, insisting that companies are open about the financial risk of taking on debt through their services.

Philip Belamant, co-founder and CEO of Zilch said his company “welcomes today’s proposals set out by HM Treasury to increase regulation in the sector”.

He said: “Today marks a positive day – in the context of the cost-of-living crisis, it’s never been more vital for people to have access to interest-free credit, via responsible organisations that carry out appropriate affordability checks and enable others to do the same through reporting via the major UK Credit Reference Agencies.”

Belamant said he hopes the announcement will “spur the acceleration for proportionate regulation in both the BNPL and wider credit lending ecosystem”, potentially creating a “blueprint for regulators and governments around the world to learn from and replicate”.