The realm of consumer credit is about to undergo significant changes as new regulations for “buy now, pay later” (BNPL) schemes are set to go into effect in July 2025. Under these new rules, shoppers utilizing BNPL options will face more stringent affordability checks. This change is primarily aimed at safeguarding consumers from accruing excessive debt, as individuals who do not meet the necessary criteria may find themselves unable to access these forms of credit.
The ease of making purchases through BNPL services has become a double-edged sword for many consumers. While it provides a quick and convenient option to buy items without immediate payment, it also poses the risk of financial pitfalls. As noted by healthcare worker Julie Rowbottom, this sort of borrowing can easily lead to a “trap” where consumers find themselves spiraling into debt. Rowbottom, in a conversation with the BBC, emphasized the importance of meticulous financial management to avoid adverse outcomes. She noted that although having immediate access to credit simplifies shopping, it can lead to a rapid accumulation of debt that goes unmonitored.
Currently, BNPL companies like Klarna and Clearpay offer interest-free credit, allowing users to buy products outright while agreeing to repay in a series of installments, typically within a year. Statistics from the Financial Conduct Authority (FCA) indicate that a staggering 11 million people in the UK have tapped into BNPL services recently. The FCA’s findings suggest that around 30% of adults aged 25 to 34 have engaged with BNPL in the preceding year, primarily for lifestyle or beauty purchases.
However, this growing trend has not escaped criticism. The sector has often been described as the “wild west” of consumer lending, with a lack of regulation allowing lenders to operate without stringent oversight. As a response to increasing concerns about rising debt levels, charities and advocacy groups have been vocally advocating for more robust consumer protections. Vikki Brownridge, the CEO of StepChange Debt Charity, lauded the new proposals as a significant advancement toward aligning BNPL with other credit forms. She highlighted alarming statistics indicating BNPL users are at a greater risk for financial strain compared to average credit users.
Recent legislative developments have paved the way for the FCA to explore regulatory measures aimed at controlling the BNPL market. Potential changes include mandated affordability assessments before allowing consumers to undertake credit agreements. The FCA aims to enhance consumer protection by ensuring borrowers are fully informed about their cancellation rights, deposit fees, and the implications of missed payments.
While these measures are expected to produce a more sustainable credit environment, they are not without consequences for businesses. Regulators predict that consumers could benefit from approximately £1.8 billion over the next decade as a result of increased regulation, while lenders might see their profits shrink by nearly £1.4 billion due to a decline in transactions. This is essentially a trade-off in favor of consumer well-being over unrestricted lending practices.
Support for the regulatory changes comes from major BNPL providers, including Klarna, which has expressed enthusiasm about the measures aimed at consumer protection while allowing for innovation in the credit sector. However, these developments occur alongside contrasting sentiments from government officials advocating for less stringent financial regulations.
As the consultation period for the FCA’s plans unfolds until late September, interim regulations will also be enacted to ensure a smooth transition. This approach will allow existing firms to align with FCA rules while maintaining their operations before receiving full authorization.
The forthcoming BNPL regulation represents a crucial shift in how consumers engage with credit products and underlines the ongoing balance between consumer freedom, innovation in finance, and the imperative to safeguard against debt accumulation. As rules are finalized, the focus will remain on protecting consumers while ensuring the credit ecosystem adapts positively to new challenges.
