New regulations taking effect today will subject buy now, pay later (BNPL) services to oversight by the Financial Conduct Authority (FCA), bringing them in line with other credit products. This overhaul aims to enhance consumer protections and prevent individuals from falling into unmanageable debt.
Under the updated rules, BNPL providers will be required to conduct affordability checks before extending credit. This typically involves a review of a customer's credit record and potentially a questionnaire about their financial situation, such as annual salary. These measures are intended to ensure borrowers can meet repayment obligations.
However, these stricter requirements could lead to a significant reduction in access to BNPL services. An estimated one-third of current users, approximately 1.6 million individuals, may no longer qualify for these payment options. This shift could pose challenges for consumers who have become reliant on BNPL for everyday expenses. Research indicates that about 11% of adults, or five million people, have used BNPL in the past year, and a portion of these users might now be excluded.
For individuals like Chloe, a 25-year-old from Bristol, BNPL became a means to manage immediate spending, leading to accumulating debt. She initially used it for a £150 makeup purchase in 2020 and found herself in a cycle where she used BNPL to cover daily expenses after her wages were depleted by previous payments. At one point, her BNPL debt reached £2,000, contributing to a total debt of £20,000 across various credit products. Chloe is now undergoing a debt management plan to address her financial situation, which she documents on social media.
Paul Mulholland, 69, a retiree living in Belfast, also turned to BNPL for essentials like groceries and clothing due to financial struggles. He found himself with over £2,000 in BNPL debt, describing the ease of use as a trap. He is now working with a debt charity to clear his balance over three years.
BNPL services, which allow shoppers to split payments, often interest-free for a set period, have grown rapidly in popularity. While typically used for smaller purchases, with an average transaction value of around £114, the unregulated nature of the sector until now meant lenders were not obligated to assess affordability rigorously. This lack of oversight meant consumers who were struggling financially could still access credit, potentially exacerbating debt problems.
The new regulations will allow consumers to complain to the Financial Ombudsman Service if they feel they have been treated unfairly by a BNPL provider, offering a recourse previously unavailable. Lenders must now provide clearer information about payment terms and consequences for missed payments. However, the rules will generally apply only to lending initiated on or after July 15, meaning existing agreements and complaints may not be covered by the new framework.
Experts caution that while the new rules are designed to prevent future debt problems, individuals already in difficulty should seek advice from their providers or debt charities. They also suggest that a decline in BNPL approval could signal a need to reassess personal finances rather than immediately seeking alternative credit.
Despite the impending regulations, some users who have struggled with debt, like Chloe, have found ways to continue using BNPL, even requesting providers to block their accounts only to open new ones. This highlights the ongoing challenge of managing spending habits, especially for those with existing financial vulnerabilities.
The FCA stated that BNPL can be a useful credit tool, but customer protection is paramount. The new requirements aim to ensure lenders assess affordability and provide adequate support to customers facing financial difficulties. Debt advice charities like StepChange and Money Wellness have long advocated for such regulations, noting that a significant percentage of BNPL users are already in problem debt, with some even using the service for essential household bills.