Fintech firms which offer buy now, pay later (BNPL) agreements for consumers are to be regulated by the Financial Conduct Authority (FCA) as debt in young shoppers soars.

A review, analysing the use of these kinds of services, found that 5 million people used a BNPL firm in 2020, more than triple the number in the previous year, as the pandemic affected household income and sent many shoppers online. A total of £27 billion was spent through these firms making it the fastest-growing form of credit in the UK.

Fintech providers such as Klarna and Clearpay have become well-known names across e-commerce websites frequented by Generation Y consumers, many of whom have been found to be increasingly seeking instant gratification through the purchase of the next ‘must have’ item, whether they have the funds to do so or not. Research shows that one in ten people using BNPL have existing debts elsewhere.

Despite being promoted as a way of offering consumers a better way to budget, critics argue these firms offer “little more than payday loans with good PR”. Concerns have been raised that the targeted advertising of BNPL options towards young people, through social media channels such as Instagram, is fuelling a rise in debt among this generation, with many not realising they are taking on debt by using this service and that defaulting on any repayment agreements can have further financial repercussions.

The announcement that BNPL firms will now fall under FCA regulations means that before lending the funds to a consumer, they will now need to check the consumer can afford the repayments. The regulations will also ensure vulnerable customers and those struggling with repayments are treated fairly; customers able to seek redress with the Financial Ombudsman Service should they feel they have a complaint.

John Glen, economic secretary to the Treasury commented,

“Many consumers do not view interest-free buy-now-pay-later as a form of credit, so do not apply the same level of scrutiny, and checks undertaken by providers tend to focus on the risk for the firm rather than how affordable it is for the customer.”

He added,

“The government’s decision to bring buy-now-pay-later into regulation will mitigate these risks by giving the Financial Conduct Authority oversight of buy-now-pay-later providers and allowing people to escalate their complaint to the Financial Ombudsman Service if things go wrong,”

Before purchasing items, whether using credit cards or a buy now, pay later option, it is important to consider whether you have the means to repay the costs or if it will simply add to existing debts which you are unable to repay.

If you are struggling with debts, it is important to seek professional advice before things spiral further. Farleys’ debt team are on hand to provide expert advice on your next steps to manage your finances. Contact us today on 0845 287 0939 or send your enquiry by email.