Huge change to buy now, pay later rules expected in weeks – what it means for millions of shoppers

A HUGE change to buy now, pay later rules is set to be announced in weeks.

New regulations could mean that shoppers must go through stricter affordability checks before they can borrow through services like Klarna or Clearpay.

Buy now, pay later (BNPL) is a financial service that allows consumers to purchase goods and services immediately and pay for them over time, often in instalments.

Klarna and Clearpay are the most prominent players, and retailers including Argos, Asos, Boots, B&M and Sainsbury’s offer the payment option too.

Laybuy was another recent player but collapsed into administration in June.

This payment method has gained significant popularity, especially in online shopping, due to its convenience and flexibility.

However, it remains unregulated.

Critics have long argued that these services can lead users into mounting debt due to insufficient affordability checks.

However, the Treasury is expected to announce new rules underpinning future regulation of the products by the end of next month.

It comes over three years after the previous government began consultation on regulating BNPL firms in 2021.

Since then, consumers in the UK have spent close to £55 billion through BNPL providers.

Before the election, Labour proposed that BNPL companies should conduct thorough affordability checks and closely monitor customers’ credit histories.

They also proposed that customers should be able to take their complaints to the Financial Ombudsman Service (FOS).

Previous government plans to regulate the industry were delayed due to concerns that stricter rules might drive lenders to relocate to countries with more lenient regulations.

While buy now, pay later services are not required to report a customer’s repayment history to credit reference agencies, Klarna began doing so in 2022.

A Treasury spokesperson said: “Regulating buy now, pay later products is crucial to protect people and deliver certainty for the sector.

“We will set out our plans shortly.”

While Labour’s plans for regulating the industry could be announced at the end of the month, it remains unclear when any new rules would come into force.

THE PROBLEM WITH BNPL

BNPL products allow consumers to defer or spread the cost of purchases over a set time frame interest-free.

For example, Klarna, one of the major players in the market, offers a “Pay in Three” product, where customers can pay for a purchase in three interest-free monthly payments.

While the products don’t charge interest, users may incur fees for late payments.

Millions of people use these payment plans every year. But because BNPL products aren’t regulated, users aren’t covered by the same protections as other credit agreements.

Banks, for example, must review customers’ credit histories and financial situations to ensure they aren’t lending more money than they can afford.

However, BNPL providers aren’t required to carry out such stringent checks, although some firms, like Klarna, have introduced them voluntarily.

Consumers who deal with regulated financial firms are also protected by the Financial Ombudsman Service (FOS), which settles complaints between companies and customers.

However, BNPL users can’t take their claims to the FOS if they think they’ve been treated unfairly.

In 2024, British consumers spent £9.4billion through BNPL services, marking a 3.5% increase from the previous year.

These purchases accounted for 15.6% of all online shopping expenditures in the year leading up to the end of July.

REGULATION DELAY

Under the previous Conservative government, insiders involved in the plans to regulate BNPL with the Treasury say the policy was far more challenging to implement than was expected.

This is because many households now rely on BNPL, and introducing stringent new rules could cause some firms to decide to exit the UK market, which would cause additional financial pressure to struggling households.

There are several other complexities to work through, too.

For example, it is understood that BNPL firms have complained to the government that it is unfair that they would be subject to new regulations, but retailers could still offer their own BNPL plans without scrutiny.

Therefore, the Treasury has had to find a solution that would make the products safe for consumers while not overburdening firms with strict requirements.

The Treasury was expected to publish a response to its latest consultation at the start of this year, but this never took place before Labour was instilled in Number 10.

ALTERNATIVE TO BNPL

When used correctly, BNPL plans can be a useful way of managing your finances.

The products work similarly to other types of credit.

The main difference is that they don’t charge interest and aren’t regulated – so you do lose out on valuable protections.

You usually have to make payments by set deadlines over a period of time.

If you meet these repayment deadlines, you shouldn’t be charged any extra fees.

However, before using BNPL, think about your options — and find the cheapest way to borrow.

If you already have a no-interest credit card or overdraft, consider whether this is the best way for you to spend. 

Another option, which might suit those with low credit scores, is using a credit union.

The interest rate offered on these loans is substantially lower than that offered on a credit card or overdraft.

Interest ranges from 12.7 per cent APR (one per cent a month) to a maximum capped rate of 42.6 per cent APR (3.5 per cent a month).