The government announced this week that the Financial Conduct Authority (FCA) will be regulating buy-now-pay-later (BNPL) products in the future.
This change came as a result of a review of the unsecured credit market, which looked at products such as credit cards, overdrafts and BNPL where you’re borrowing without a collateral.
BNPL was seen as particularly problematic as many products are exempt from regulation.
At the same time, the use of these products has nearly quadrupled in 2020 and now stands at £2.7 billion according to the FCA. In fact, five million people have started using BNPL products since the start of the coronavirus pandemic.
While BNPL can be a great way to spread the cost of buying a big ticket item, not all consumers see it as borrowing, especially for low cost purchases, which can trigger a spending spiral and in turn get them into debt.
The government said that currently BNPL firms only looked at the risks to them and not how affordable the borrowing is to the consumer.
Once they’re brought under FCA regulation, they will have to carry out affordability checks in the same way that credit card companies do.
The details haven’t been released yet – the legislation will have to go through parliament at a future date – but it may well mean having to go through credit checks before you can use a BNPL product in the future. Any BNPL borrowing could also be factored into calculating your credit score.
However, regulation does mean that consumers will be able to complain to the Financial Ombudsman Service when things go wrong, which gives them greater financial protection.