The UK Government is to apply more stringent regulations to the buy now pay later (BNPL) industry; as many continue to turn to payment instalments to manage the rising cost of living.
In the announcement made on Monday, 20 June, the Government outlined its intentions to introduce BNPL systems and providers to a wider regulatory framework which will seek to promote fairness, transparency and guided industry development.
As the paytech has made historic leaps and bounds in terms of consumer adoption, the regulation around this form of alternative finance has struggled to keep pace; placing consumers at risk when using the service.
In today’s Spotlight, we’ll be delving into what the announcement had to say about regulating BNPL, and hearing more about exactly what the industry thinks of this latest move that could work to define how the service is provided.
What the announcement said
The UK Government disclosed a series of initiatives throughout its announcement that seek to offer more protection to consumers, and raise awareness around the full implications of using BNPL services.
Expected to come into action from 2024, any lenders providing the service will need to be approved by the UK’s Financial Conduct Authority (FCA), and will also be required to perform regular affordability checks to ensure that the loans they’re offering are affordable for the customers who receive them.
Advertisement for BNPL should be equally clarified, with the announcement stating that they should be ‘fair, clear and not misleading’.
The announcement also provides more options to borrowers who feel like they’ve been abused, with the Financial Ombudsman Service (FOS) now directly accepting BNPL complaints from consumers.
The regulations aren’t just for BNPL, and will also apply to other forms of short-term interest-free credit, such as financing for larger purchases like furniture and medical work.
Any company that chooses to offer this form of financing will need to comply with exactly the same rules as larger, established providers.
The Government has confirmed that these rules will apply to businesses that partner with a third-party lender to offer credit services, including throughout embedded finance options.
Although its consultation on draft legislation is expected to be published sometime later this ear, the Government is currently in the process of seeking stakeholder feedback to confirm whether or not to extend the regulation to online merchants who directly offer credit for the purchase of their own products.
Following this announcement, the government is expected to propose secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.
Speaking in the official announcement, John Glen, economic secretary to the Treasury recognised the benefits that BNPL brings to financial management but went on to identify that “we need to ensure that people can embrace new products and services with the appropriate protections in place.
“By holding BNPL to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”
This latest move by the Government will ensure that even those that were previously exempt from regulations will now have to adhere to them, increasing its scope, while also setting out to actively educate and protect the end consumer.
What the industry thinks
Although many of the companies that have spoken directly to The Fintech Times have expressed their relief that dialogue around the BNPL regulatory space is finally emerging, many continue to worry about the speed at which these regulations are arriving, while some believe that it could negatively impact the integrity of the market.
While the regulations come as a welcomed arrival, Neil Kadagathur, CEO and co-founder of Creditspring, worries that “we simply cannot wait that long to regulate the BNPL sector.”
“There is chronic miseducation about BNPL,” he explains. “One in seven UK adults thinks it’s impossible to get into debt using BNPL and a third are unaware that it’s even a form of borrowing and debt. This, combined with the cost of living crisis which we know is pushing more people into borrowing, is unsafe and unsustainable, and is guaranteed to damage the long-term financial health of millions of UK borrowers.”
However, Kadagathur does recognise the purpose of the regulations, stating that “the onus falls to lenders to ensure they are lending safely and protecting borrowers by not providing more credit than an individual can safely afford to repay.”
Echoing Kadagathur’s thoughts, Myron Jobson, a senior personal finance analyst at interactive investor, agrees that “regulation of the BNPL is long overdue,” and that as BNPL mass adoption continues, “the worry is the plans will not be implemented soon enough.”
“BNPL is a form of debt, and, as such should be subject to the same rules that govern the traditional credit industry, requiring things like affordability checks and allowing borrowers to be able to make a complaint to the FOS,” he comments.
Recognising the benefits of BNPL, including its convenience, speed, cost and commerce-boosting abilities, Jobson emphasises that “It’s important that any rules and measures applied to the BNPL industry do not nullify these benefits.”
“But greater protection for consumers is overdue,” he continues. “Many BNPL services don’t subject customers to a hard credit check. As such, a key issue with BNPL is it may attract people who are already in the red and may be struggling to pay existing bills. So, it is likely that a large number of people making BNPL repayments are also racking up credit card debt.
“It is only right that the credit market continues to evolve with time to cater for changing attitudes and requirements, but innovation without regulation spells danger for consumers.”
Speaking on the proposed reforms to the Consumer Credit Act (CCA), which would bring benefits to both the merchant and the consumer, Bradley Rice, partner at law firm Ashurst, expressed his frustration that the arrival of this new BNPL regulation would now delay the arrival of the benefits of the CCA reform.
Rice comments: “The Treasury has confirmed the end of unregulated BNPL lending and other forms of short-term interest-free credit, likely with effect from around 2024.
“Last week the Treasury wet our appetites at the prospect of ripping up the CCA as part of much-needed reform. This week, it seems the CCA will live on a while longer with a new bespoke regime for BNPL and short-term interest-free credit agreements.
“It seems like reform of the CCA could be a long, drawn-out process that is not particularly high on the Treasury’s agenda.”
Jayadeep Nair, chief product and marketing officer at Equifax UK, expressed his admiration for the new regulations, saying “It’s good to see that the Treasury and FCA are moving in the right direction on the regulation of the BNPL sector.”
The company largely agree with “the Government’s view that clear, consistent and timely credit reporting across the three main credit reference agencies will be an important part of the responsible provision of BNPL products,” adding that “this level of transparency will help to bring hidden lending into the light, and ensure that all consumers who use BNPL get the same benefits and the same level of protection.”
“The fair treatment of those in default or arrears is also a vital part of consumer safeguarding,” Nair continues, “and the statutory requirements on the provision of information to consumers in arrears and default are vital consumer protections, so we are pleased to see these included as well.”
Despite the benefits posed by the reform, Nair admits that “we are still a long way from the finish line, but the outcome of this consultation is another milestone on the path to a set of well-reasoned and much-needed regulatory standards; standards that keep the features of BNPL so many consumers like, but that protect people from problem debt.”
Frances Hodgkins, the managing associate in Linklaters’ financial regulation team, comments that despite the UK Government’s recognition of BNPL’s suitability to remedy the current economic environment, the introduction of these new regulations could unintentionally hinder the customer experience.
“[The Government] are … looking to enhance consumer protection for those using BNPL services, something that will no doubt introduce friction into BNPL transactions and slow down the customer experience,” comments Hodgkins, “without unduly hindering the provision of BNPL products.
“Although this friction will likely benefit consumers by giving them more time to assess whether the credit agreement meets their needs, it is paramount that the regulatory controls applied are proportionate to the risks presented.”
“It is worth saying that we are still a reasonable way off,” comments Hodgkins, echoing the thoughts of many in this discussion, “with the government expecting to publish a consultation on the draft legislation later in the year and to finalise the law by summer 2023.
“Only then, once the law has been finalised, will the FCA start to consult on the detailed rules. It is fair to say, however, that while regulation won’t be the end of the story, it will mark a new chapter for both consumers and providers.”
Clearpay shared a slightly more hopeful view on the new regulations, stating: “Today, we welcome the Government’s response on BNPL regulation, as it acknowledges that BNPL is an important consumer-centric payment option used by millions of people every day.
“The right regulation will set high industry standards across the board that will safeguard all consumers using BNPL. We support the Government’s intention to provide BNPL consumers with access to the FOS and to apply Section 75 cover to BNPL agreements.
“Until the arrival of BNPL products like Clearpay, the credit card industry, which profits from revolving debt cycles, went unchallenged. We look forward to working with HM Treasury and the FCA to deliver regulation that will protect consumers, deliver innovation in consumer credit, and help move the UK away from a reliance on revolving debt.”
The arms of Paynetics’ Mike Peplow were equally as embracing of the new regulations, with the CEO stating: “Regulation is an appropriate development for the BNPL space, bringing the product into the mainstream whilst making sure we have positive outcomes for consumers.
“Although BNPL often doesn’t charge an interest rate to the consumer, there are penalties and repercussions for late or non-payment.
“Simply providing a link to terms and conditions on a website, or providing a page of small print in an app, is not going to be sufficient to convince the regulator that firms have sufficiently communicated the implications of taking on a BNPL product.
“The new affordability checks coming into play today will protect consumers from spending beyond their means. Regulation is a vital next step for BNPL and I believe these changes will help the consumer while continuing to champion the development of this innovative sector.”
The praises continued with Gary Rohloff, co-founder and managing director of Laybuy, who shared that the company has “always been in favour of a proportionate model of regulation, one that reflects the low risk of BNPL, supports small e-commerce businesses and sets high standards across the industry.”
“Since we started Laybuy,” he continues, “we have always set out to be the most responsible BNPL lender. That means working with credit reference agencies and conducting creditworthiness checks on all our customers. It’s a real endorsement of our model that the Government agrees that this should be taken forward across the industry.
“Naturally, we need to have a look at the consultation response in full, but we’re supportive of the Government’s approach and we look forward to working closely with the FCA on the next steps.”
“Innovate Finance welcomes the government’s response to the consultation on regulating BNPL,” shared the company’s CEO, Janine Hirt, agreeing that “it’s an important step towards bringing BNPL into the regulatory perimeter, which will give certainty to providers, and drive up confidence and trust in the sector.”
She continues: “We are pleased to see the government maintain its focus on creating a proportionate regime for the sector, striking a balance between providing consumer protection while maintaining a healthy, innovative market for BNPL products.
“It will be critical to get the details right on some of the most important areas, such as creditworthiness, form and content of agreements, and financial promotions. We look forward to working with HM Treasury and the FCA on these elements over the coming months, and finalising the regulations as quickly as possible.”