Buy Now, Pay Later: deep dive into Section 75

Buy now, pay later (BNPL) has been a godsend for those able to play by the rules – purchase items, try them on, send anything back if needed – all before actually paying for the goods. Corporations such as Clearpay, OpenPay, Splitit, Laybuy and Payl8r benefit customers by providing a platform to spread out the cost of items. For instance, paying for an iPhone out of pocket can cost an arm and a leg, but paying in monthly instalments – or 30 days later – can make payments more manageable. In many ways, BNPL creates a new way of living where consumers can afford expensive items by spreading out the cost, without breaking the bank and leaving funds to afford the monthly necessities.

This isn’t reserved solely for luxury goods either, there’s also been talk of customers using BNPL services for things like bills, or necessities – spreading large one-off sums over weeks or months.

BNPL grew significantly in popularity across the last few years.  Last Christmas, almost one in 10 customers were looking to use BNPL for their Christmas shopping. With inflation climbing and the energy crisis getting worse, it is likely that BNPL use will follow suit and its usage may rise. Despite this, the regulatory framework surrounding BNPL is patchy at best. As more and more users flock to use BNPL, the gaps in consumer protection regulation only widen.

According to Bank Rate, 60% of survey respondents used BNPL during the Covid-19 pandemic and the number of users is projected to be 59.3 million in 2022. The pandemic and rising costs have fuelled BNPL growth – creating almost a necessity for payments to be at a later date so they don’t have a chokehold on the current month’s finances.

BNPL is a double-edged sword

The flexibility and easiness of BNPL can take a toll on those who spend more than they have. With 66% of respondents of the Bank Rate survey depicted BNPL as “financially risky.” It can “create an illusion that items are less expensive than they are,” and can even feel like you’re not really spending the money in your bank account. Accordingly, customers could be hit with more debt than they can afford.

With all things ‘good,’ there does come a stop sign. With massive growth comes greater responsibility for businesses and consumers who are left with more debt to manage. Without proper regulations in place, it can be difficult to sustain growth – and with more customers choosing BNPL, the higher the financial risks.

Regulators are acting fast to implement and assess regulatory frameworks for BNPL, but in the meantime, it remains outside the usual lines for consumer protection. For instance, BNPL providers are not currently in harmony with Section 75 of the Consumer Credit Act (CCA) – a section of the CCA that protects consumers when entering a credit agreement. Taking this into consideration, regulators are cracking down on this fast-growing industry to help those to manage better with any payments they’ve chosen to ‘pay later.’

What is Section 75?

Section 75 of the Consumer Credit Act 1974 says that credit companies are jointly and severally liable for any breach of contract or misrepresentation by the retailer. While this extends to credit card companies, it doesn’t yet place liability on BNPL providers. This means that, at the moment, BNPL consumers are not protected under Section 75 of the Consumer Credit Act – whereas, if they use a credit card or a loan to purchase goods or services, the transaction would be covered. However, regulation for BNPL is on the horizon.

The regulatory landscape for BNPL

In June 2022, the Government announced that BNPL regulation will be strengthened in order to protect consumers.

Economic Secretary to the Treasury, John Glen cited, “Buy Now Pay Later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place.”

“By holding Buy Now Pay Later 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.”

Regulators have already scrutinised BNPL companies for misleading adverts that don’t properly highlight the downfalls of short-term, interest-free loans. As per the announcement, the Government will also be introducing the following BNPL regulation with the view to improving borrower protection:

1. Proper affordability checks will need to be in place to vet out customers who are unable to pay for a product or service. This will decrease the number of customers falling into the debt trap.
2. Adverts promoting BNPL services will need to specify the consequences of missed payments. They will also need to be “fair, clear and not misleading.”
3. Borrowers will be entitled to make complaints to the Financial Ombudsman Service (FOS)

This renewed approach to regulatory controls for BNPL agreements will see consumers protected under the bracket of the CCA. This is welcome news for many, including those within financial services who have long argued the need for CCA reform to “support innovation and help firms better support customers.” 

The BNPL industry can expect more regulations as the Government aims to publish draft legislation by the end of 2022 and set out secondary legislation by mid-2023. Thenceforth, the Government will pass on the torch to the FCA to consult on future laws, as and when it is required.

What can firms do to prepare for emerging BNPL regulations?

Once BNPL regulations are executed, compliance officers can expect more papers on their desks – as the regulatory burden is passed down to them. Ultimately, users will have sufficient Section 75 protection and it will create extra work for businesses. Rules that not only force BNPL to stay in the same boxing ring as national banks but to put customer protection forefront.

Many compliance teams still use manual processes or legacy technology to deal with regulations. This can lead to missed regulation and inefficiencies – as with any role, there is always the chance of something going wrong. To help keep on top of compliance demands, implement a compliance officer’s best friend – Automated Regulatory Intelligence (ARI) – to assist you in your end-end compliance processes.

Using sophisticated AI, CUBE’s products work fast to close any gaps in your compliance by understanding business needs and identifying the regulations that are relevant to you.

We’re here to give you complete peace of mind and the knowledge that you’ve got regulatory change covered.

RegTech saves compliance officers hours of manual processes and frees up time to focus on critical thinking for compliance – it truly is an efficient and user-friendly way of closing regulatory gaps.

CUBE Comment

The upcoming regulations for BNPL are just a small cog in the larger wheel; the wheel being shifting regulatory attitudes that focus on transparency and consumer protection. It supports this idea of establishing a playing field where our financial industry not only generates growth and profit but also takes care of its customers.

A greater level of transparency alludes to knowledgeable customers who can make improved and informed financial decisions. This is especially important for Buy Now, Pay Later customers.

To better equip compliance teams, Automated Regulatory Intelligence (ARI) can ease the ever-increasing regulatory burden. CUBE takes all of the world’s regulatory content, standardises it, makes sense of it and maps it to your business profile and compliance frameworks using AI.