Buy-now-pay-later schemes are set to face stricter regulations and controls after the Financial Conduct Authority (FCA) published a review into the unsecured credit market.
BNPL products have seen a “rapid” increase in popularity as the pandemic has continued to drive online shopping. These purchases nearly quadrupled in 2020, with sales reaching a total of £2.7bn, and five million people have purchased these products since the beginning of the pandemic.
However, the FCA warned that there is a “significant risk” that these agreements could cause harm to consumers, with more than one in 10 customers already in debt arrears through these schemes.
The latest review, commissioned by the FCA board, sets out how regulation can better support a “healthy market” for unsecured lending, taking into account the impact of the pandemic and new developments in the market.
The review found that BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter “as a matter of urgency”, as regulation would protect consumers and make the market sustainable.
In addition, the review called for the provision of debt advice through free debt advice services, and more alternatives to high-cost credit.
Following the review, the government has confirmed that BNPL providers will now be subject to FCA rules and regulations so will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.
Christopher Woolard, chair of the review, said: “Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone.
“New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty.”
He added: “Changes are urgently needed: to bring BNPL into regulation to protect consumers; to ensure that there is secure provision of debt advice to help all those who may need it; and to maintain a sustained regulatory response to the pandemic.”
Charles Randell, chair at the FCA, said: “Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses. While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households.
“Many people have been able to reduce their debts, but some of the poorest in our society have exhausted any savings or run up more debts. All the authorities which cover debt and debt advice must act together systematically to prevent problem debt and to help people get out of a spiral of debt through properly funded debt advice.”
He added: “Regulation should be consistent and the Review shows how we can ensure high standards in consumer credit regardless of the form of credit.”