Saturday, June 25, 2022

Plans to tighten “buy now, pay later” rules are too late for customers, warns Martin Lewis

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Although the government has proposed tougher rules for “buy now, pay later” lenders, they won’t come into effect until at least 2024

Lenders must “perform affordability checks” on customers and are asked to ensure ads featuring BNPL promotions are “fair, clear and not misleading”, according to new Treasury Department proposals.

The government’s move to tighten regulation of interest-free Buy Now, Pay Later (BNPL) will be too slow to help customers facing a “bleak winter” as the cost of living continues to rise.

Firms offering BNPL credit must also be approved by the Financial Conduct Authority (FCA) and customers can lodge formal complaints with the Financial Ombudsman Service (FOS).

The new rules will not come into force for some time, but the Treasury said the government would consider the proposed rules “towards the end of this year”, while secondary legislation would be tabled in Parliament by mid-2023.

That means the stricter rules likely won’t come into effect until 2024, said Martin Lewis, founder of MoneySavingExpert.com. He also warned that changes would not help households grappling with the increased cost of living this winter.

“The pace of progress is excruciatingly slow. “Buy now, pay later” regulation is badly needed, so my excitement that it’s finally happening is tempered by frustration at how long it’s taking,” Mr Lewis said.

He added that almost two years have passed since MoneySavingExpert first raised concerns about the rapid growth of the BNPL sector and called for urgent regulation. “Yet those safeguards will not be in place for the coming financially dismal winter,” he added.

A study released earlier this month found that more than 40 percent of BNPL customers rely on other methods, such as credit cards, overdrafts and loans from friends and family, to keep up with repayments.

According to Citizens Advice, younger shoppers are particularly vulnerable to mounting debt, with 51 percent of 18-34 year olds taking out loans to pay off BNPL purchases.

Almost one in ten (9 percent) of people have used BNPL schemes to cover essentials, a separate survey by Hargreaves Lansdown found.

Customers who default on their repayments may also find their creditworthiness hit after BNPL lender Klarna announced it would start reporting its customers’ use of its products to UK credit bureaus.

Dame Clare Moriarty, chief executive of Citizens Advice, said the sector, while growing “at a rapid pace”, could remain unregulated despite the government’s announcement of several rules

“Every day spent waiting for regulations is another day shoppers are left unprotected and ill-informed,” she added.

“We saw a buyer threatened with debt collectors after splitting payment for a t-shirt and more recently two in five worried BNPL customers who borrowed money to make repayments.

“The government’s proposed rules will provide vital protections for many, but it needs to speed up those plans.”

Gary Rohloff, co-founder of New Zealand’s BNPL service Laybuy, said his company supports the government’s proposed rules and will work closely with the FCA to implement them.

“We have always advocated an appropriate regulatory model that reflects BNPL’s low risk, supports small e-commerce businesses and sets high standards across the industry,” he added.

Rocio Concha, director of policy and advocacy at consumer rights group which?, added that while BNPL represents a “simple and convenient way” to pay for purchases worth millions, customers are offered little information on how the system works.

“With the cost of living rising, proper affordability checks are needed to prevent people from building up debt that they may find difficult to repay,” she said.

“It is encouraging that the government has now presented plans to strengthen regulation of interest-free BNPL loan agreements, but this urgently needs to be put in place to ensure users are adequately protected.”

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