The U.K. government announced on Monday its proposals to institute formal regulations for short-term lending, aiming to curb what it describes as the “wild west” environment of the buy now, pay later sector.
Fintech companies such as Klarna and Block’s Afterpay have gained significant traction by facilitating interest-free financing, catering to a wide range of products from apparel to food deliveries. However, their rapid growth has raised concerns regarding the affordability of their offerings. The competitive landscape is intensifying, especially with U.S.-based Affirm entering the U.K. market last year.
City Minister Emma Reynolds stated that the forthcoming regulations are intended to address the chaotic nature of the BNPL industry, asserting that the measures “will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow, and create jobs.”
According to the proposed rules, BNPL companies will be mandated to conduct upfront assessments to determine borrowers’ ability to repay and ensure that customers can easily access refunds.
Additionally, consumers will gain the ability to escalate complaints regarding BNPL services to the Financial Ombudsman, a governmental body established to resolve disputes between consumers and financial service providers.
The new regulations are anticipated to be implemented by next year, as confirmed by the government.
Klarna expressed its long-standing support for regulatory measures, emphasizing the importance of consumer protection and innovation in the sector. A representative stated to Finance Newso, “It’s good to see progress on regulation, and we look forward to working with the FCA on rules to protect consumers and encourage innovation.”
Clearpay, the U.K. branch of Afterpay, articulated that regulation would bring much-needed clarity and consistency to the industry. “It will also create a more sustainable foundation for the future of BNPL as it continues to grow as an everyday payment option for consumers,” the spokesperson noted.
While BNPL companies have largely welcomed the idea of regulation, there are apprehensions about the application of dated laws to their modern business models. The existing Consumer Credit Act, which governs lending practices in the U.K., has been in place for over half a century.
To address this, the government has committed to revising the Consumer Credit Act to establish a “modern, pro-growth framework that reflects how people borrow today.”
