BNPL allows shoppers to spread purchase costs interest-free at the checkouts – meaning they may not need to turn to expensive borrowing. Still, BNPL has been criticised for potentially encouraging people to spend more than they had planned and getting into debts that they cannot comfortably pay back. Under the plans, providers will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.
The volume of transactions tripled in 2020 as the coronavirus pandemic drove online shopping, and there is now a significant risk that these agreements could cause harm to consumers, the Government said. By announcing plans to legislate to bring interest-free BNPL products into regulation, the Government said it is acting swiftly to ensure people can continue to benefit from the products with the right protections.
The announcement comes as a review of the unsecured credit market recommended bringing interest-free buy now pay later into FCA supervision. The Woolard Review found several potential harms which can be mitigated by bringing agreements into regulation. Many consumers do not view interest-free BNPL as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the company rather than how affordable it is for the customer.
With several providers planning to expand to higher-value retailers, or offer their products in-store, the risk that consumers could take on unaffordable levels of debt is increasing. Bringing providers under the FCA’s regulation means people will be able to take complaints to the Financial Ombudsman Service (FOS) if they are unhappy with the response they get from the firm.
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