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The UK government has launched a highly anticipated consultation to bring “buy now, pay later” lenders under the scrutiny of the Financial Conduct Authority and the Consumer Credit Act.

The new regulation would allow the finance watchdog to apply rules on affordability, meaning that BNPL providers including Klarna and Clearpay would have to check that shoppers were able to afford repayments before offering a loan.

“We promised to take action before the election and now we are delivering,” said Tulip Siddiq, economic secretary to the Treasury. “Our approach will give shoppers access to the key protections provided by other forms of credit while providing the sector with the certainty it needs to innovate and grow.”

BNPL loans have soared in popularity in recent years by offering consumers the ability to spread their payments in short-term instalments with no interest. However, the sector has remained unregulated, meaning providers do not have to run affordability checks on prospective users.

Consumer groups have warned that the current regime can lead people to accrue large debts from late repayment fees on products from different providers.

Research commissioned by the Centre for Financial Capability, a UK-based financial education charity, found that almost a quarter of BNPL loans were charged late repayment fees in the six months to December 2023.

The UK government first said it would regulate interest-free BNPL loans in February 2021. The Treasury ran a consultation in early 2023 and announced plans to regulate the sector.

However, the previous Conservative government announced a delay in implementing draft legislation in July 2023, sparking criticism from the Labour party.

“Millions of people use buy now, pay later to manage their finances, but the previous government’s dither and delay left them unprotected,” said Siddiq on Wednesday.