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Ministers tighten rules on buy-now, pay-later loans

The Treasury will tighten regulation of “buy-now, pay-later” schemes following warnings that the loans are sending shoppers into debt.

Lenders now need to be approved by the Financial Conduct Authority (FCA) and required to carry out affordability checks on customers, who will be able to take complaints to the financial ombudsman service, which settles disputes.

The government said in a response to its consultation on the regulation of buy-now, pay-later schemes that it would amend rules on financial promotion to ensure that the advertisements for the schemes were not misleading.

The service lets people buy products and stagger payments with no interest or charges unless they miss repayment deadlines. For example, someone buying a £30 T-shirt from Asos could pay £10 on the day of purchase, followed by two monthly payments of £10.

There was a surge in the popularity of such credit during the pandemic, particularly among younger shoppers with stretched finances. Company figures show that an estimated 17 million people have used buy-now, pay-later, including almost a third of those in their twenties.

Lenders make their money from retailers by taking a cut of each transaction. The payment model, which was largely used at first for low-cost fashion products, is increasingly being used for items including holidays, furniture and even property rental payments.

The market pioneer is the Swedish company Klarna, which is the biggest provider in the UK, although others are starting to move into the space.

This month, Apple, the technology giant, announced plans for a buy-now, pay-later feature for Apple Pay users. Zopa, the online bank, has also launched its own service.

More than two in five customers of the schemes borrowed money to keep up with payments, according to research by Citizens Advice published this month. The most popular type of borrowing was through credit cards. People also borrowed money from their banks through overdrafts, as well as through friends, family, and payday loans.

The charity, which has campaigned for tighter regulation, found that young shoppers were increasingly borrowing money to repay the buy-now, pay-later loans, leaving many in a “spiral of debt”.

Dame Clare Moriarty, chief executive of Citizens Advice, said the government should accelerate its plans for regulation. “The buy-now, pay-later sector continues to grow at a meteoric rate, but it could now remain unregulated for years,” she said. “Every day spent waiting is yet another day that shoppers are left unprotected and ill informed. The government’s proposed rules will provide vital protection to many, but it must turbo-charge these plans.”

John Glen, economic secretary to the Treasury, said: “Buy-now, pay-later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place.” He said the schemes would now be held to the same standards as other loans and forms of credit.

Laybuy, one of the UK’s top three buy-now, pay-later providers, said it supported a “proportionate” model of regulation. Its managing director, Gary Rohloff, said: “We need to have a look at the consultation response in full, but we’re supportive of the government’s approach and look forward to working closely with the FCA on the next steps.”

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