The UK Government has announced plans to strengthen regulation of interest-free buy now, pay later (BNPL) credit agreements, which is says will protect millions of people.

As part of the plan, lenders will be required to ensure loans are affordable, and rules will be amended to ensure advertisements are fair, clear and not misleading.

The Government will expand the rules to cover other forms of unsecured short-term credit that pose similar risks to consumers (such as those used for dentistry work).

BNPL credit agreements can be a helpful way to manage finances, enabling consumers to spread the full cost of a purchase over time. However, states the Government, people do not currently have the usual full range of borrower protections when taking out this type of loan, and they are rapidly increasing in popularity, resulting in a potential risk of harm.

Yesterday, the Government confirmed that lenders will be required to carry out affordability checks, ensuring loans are affordable for consumers, and will amend financial promotion rules to ensure BNPL advertisements are fair, clear, and not misleading. Lenders offering the product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take a complaint to the Financial Ombudsman Service (FOS). 

Economic Secretary to the Treasury, John Glen, comments: “BNPL 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. By holding BNPL to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”

Yesterday's consultation response sets out the Government’s proposals for regulation of the sector. Given its complexity, the Government will publish a consultation on draft legislation toward the end of this year. Following this, the Government aims to lay secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.

The government has also confirmed that other forms of short-term, interest-free credit, such as those used to pay for larger items like furniture, will be required to comply with the same rules announced yesterday, given that the risks posed are similar, and consumers should receive consistent protections from similar products.

These rules will apply to businesses that partner with a third-party lender to provide credit, and the Government is asking for further stakeholder feedback to confirm whether they should also apply to online merchants which directly offer credit for the purchase of their own products.

Adam Kirkby, head of sales for retail finance provider etika, comments: "This is a wake-up call for the BNPL market. The new rules are an opportunity to build better standards and drive safer growth for this innovative market that retailers and customers have come to rely on."