Following a government review, the Financial Conduct Authority (FCA) announced on February 2nd 2021, that largely unregulated buy-now-pay-later providers will now face stricter controls. 

Buy now pay later (BNPL) is a fast-growing new method of making online purchases. Providers, such as Klarna, Clearpay and PayL8r allow customers to split or delay payments for goods, from major retailers, without paying interest.  For many, these agreements can be a useful way of managing finances but a surge in popularity has led to concerns that some consumers may accrue high levels of debt.

Is It Credit?

In the strictest definition of the word- no. BNPL operators do not charge interest, instead, they charge a fee to the retailer and some charge late payment fees to customers. Many service providers would argue they are more payment providers than credit firms, allowing consumers to shop with more flexibility. However, this new legislation will bring BNPL services more in line with other credit providers.

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The use of buy-now-pay-later products has risen fourfold over the course of the pandemic. An increase in online shopping, at a time when people’s finances have been under more pressure, accounts for the popularity of this £2.7bn sector.  According to a recent survey commissioned by Compare the Market, one in five shoppers has used a BNPL scheme over the past year. There are also obvious benefits for retailers, with customers spending more with each order and shopping more frequently- BNPL has simply become too significant to overlook.

What Are the Risks?

The Woolard Review flagged several potential harms that would be mitigated against if BNPL agreements became regulated.  The main concern is the potential risk for customers to accrue serious debt, which would negatively impact credit score and affect future borrowing potential.

The expansion of the sector to include high-price retailers, and the capacity for shoppers to take out multiple agreements with different BNPL providers increases the risk of spiralling debt. Moreover, without FCA regulation BNPL customers with a problem or complaint are unable to take their case to the Financial Ombudsman or any other official body. This will now change with the new ruling.

What Will Regulation Mean?

Under the new plans, BNPL providers will need to undertake affordability checks before lending and ensure consumers are treated fairly, particularly those who are vulnerable or struggling with repayments. Providers have broadly welcomed regulation stating that previously it had not “kept up with innovation and changes in consumer behaviour”.  After consultation with the industry, the government has said it will regulate as soon as possible.


If your firm has been impacted by the recent changes in the unsecured credit market and must now consider regulation compliance, 1RS would be happy to discuss RegTech software solutions built to meet your business’s needs and supported by risk and compliance experts.