Last month Labour MP’s for Walthamstow Stella Creasy urged ministers to regulate Buy now, pay later lenders such as Klarna, Clearpay and Paypal warning of a “financial scandal waiting to happen”.
These payment services, offered through major online retailers, allow people to split payments instantly and interest-free and are used by millions of people.
But the Financial Conduct Authority (FCA) said it would be easy to build-up unseen debts of £1,000.
Now it will regulate the sector, after use of these services saw a nearly fourfold rise last year.
Buy now, pay later services were used by five million people in the UK for total sales of £2.7bn.
The FCA review into credit services found that one in 10 people using them already had debt arrears elsewhere.
Today the Economic Secretary to the Treasury John Glen said: “Buy-now-pay-later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular. By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”
Chris Woolard, who led the FCA review recommending regulation, said that although buy now, pay later was convenient for some people, for others it was “a really easy way to fall into problem debt”.
This debt would not be seen by credit reference agencies and other lenders.
Under the new plans, providers would need to undertake affordability checks before lending and ensure customers were treated fairly, particularly those who are vulnerable or struggling with repayments.
The government said it would legislate as soon as possible, following consultation.