Shoppers using Buy Now Pay Later services are waking up to stronger rights – but tens of thousands are already being refused loans for the first time as new rules force lenders to check affordability on every transaction.
From Wednesday, providers such as Klarna and Clearpay must have authorisation from the Financial Conduct Authority to operate, bringing them more in line with credit card companies and banks. Customers can now refer unresolved complaints to the Financial Ombudsman Service, which expects to deal with about 2,000 cases by the end of March. And for faulty goods costing more than £100, consumers can claim refunds and compensation from the BNPL provider under section 75 – the same protection that applies to credit card purchases.
“New BNPL rules require lenders to be FCA authorised, but affordability checks could block up to 30% of users.”
But the price of protection is that borrowers must pass an instant, automatic test proving they can repay the loan, or the purchase will be blocked. Regulators say the stricter rules will prevent people from splashing out on something unaffordable in a few clicks, taking on too much debt and being caught out by late payment fees.
Kate Pender, chief executive of the not-for-profit Fair4All Finance, said the change was clearly needed and welcomed – but warned that conservative affordability checks, designed individually by each lender, could lock out 10% to 30% of BNPL users. “While regulation is clearly needed and welcomed, our recent research found that nearly half of those likely to be rejected have not missed a BNPL payment,” she said. “The need for credit doesn’t just disappear when you can’t access it and people are often pushed towards more expensive or unregulated alternatives.”
Pender’s organisation, which promotes fair and accessible financial services, pointed to the risk of loan sharks – a threat she described as “thrilled” to see customers turned away from legitimate credit.
Klarna, the UK’s largest BNPL provider, pushed back against those fears. “Klarna doesn’t share these concerns because the new rules largely formalise what we already do: we run affordability checks, show costs upfront and report to credit reference agencies,” a spokesman said. “Like the [regulator], we expect the new regulation will ultimately lead to growth as it increases consumer trust and confidence.”
The changes have been fought for by campaigners who long called the unregulated sector a “Wild West”. Borrowers must now get clear upfront information about what happens if they miss a payment, and be directed to free debt advice if they fall into financial difficulty. The question that remains is whether the crackdown will protect the vulnerable – or push them into the arms of loan sharks.