Get ready for Buy Now, Pay Later regulation

The Buy Now, Pay Later (BNPL) industry is growing at an exponential rate. In the UK alone, more than 51 percent of 81-34 year-olds and almost 20 percent of over 65-year-olds use BNPL services. According to The Centre for Financial Capability, this is an increase from 40 percent last year. In the US, approximately 1 in 5 individuals use BNPL – which is around 79 million users in total, which increased by 56.1 percent since January 2022.

An estimated 360 million people worldwide use BNPL – a figure set to more than double in the next five years as Big Tech firms such as Apple and banks such as Santander move into this sector.

Interest-free credit in the form of paying 30 days later or in instalments has become increasingly attractive as prices worldwide soar. Consumers have turned to BNPL as they struggle with the cost-of-living crises and inflation, opting to spread their payments into instalments. What is not advertised is the dark side of BNPL – such as falling into debt and bad credit ratings in the case of missed payments.

With great power comes even greater responsibility. Unlike traditional loan providers, BNPL providers lack affordability checks and credit checks.

UK takes a leap forward in BNPL regulation

On 14 February 2023, the Government published draft legislation to bring BNPL products under the Financial Conduct Authority’s (FCA) regulation. Whilst this is a positive step forward in protecting consumers, the BNPL landscape has been rocky for quite some time and the need for enhanced consumer protection is not a new topic.

Despite Citizens Advice – an independent charitable organisation that provides advice on debt, legal, consumer and housing – urgently requesting BNPL to be regulated, it has taken the Government two years to act since announcing its plans to regulate back in February 2021. Matthew Upton, Director of Policy at Citizens Advice commented that the “consultation has been a long time coming” and compared BNPL borrowing to “quicksand – easy to slip into and very difficult to get out of.”

Key takeaways from the BNPL proposal

Instead of creating new regulations for BNPL, existing consumer credit rules under the Consumer Credit Act 1974 (CCA) will be applied to BNPL as well as other short-term interest-free credit agreements (STIFC) due to an overlap of products. The main difference is that BNPL is a service provided online, usually, multiple low-value agreements, with a third-party lender involved and STIFC is frequently offered in-store with consumers taking out a single, higher-value agreement with either a third-party lender or the merchant. The STIFC has been around for quite some time without significant consumer harm.

1. FCA-authorised firms must approve any promotions of BNPL/STIFC

The FCA-authorised firm must ensure all promotional materials are fair, clear and not misleading as per the UK’s financial services marketing rules (the “financial promotions regime”). Currently, the regime is being bolstered to require authorised firms to be granted permission by the FCA to be able to approve promotions.

2. Consumers are now able to complain directly to the Financial Ombudsman Service (FOS)

BNPL products will be brought under the FOS, allowing consumers to make complaints when needed.

3. Specific pre-contractual requirements

The Government plans to exclude the pre-contractual requirements in the CCA from draft legislation, arguing that they are too “disproportionate and inflexible.” Instead, the FCA will be responsible for creating rules that specify these requirements. Failure to comply will not render the agreements unenforceable, but borrowers may be entitled to claim damages if they suffer any losses due to a breach of rules.

4. Adjustment period

The government plans to allow for an implementation period before the new rules take effect on “regulation day” to give firms sufficient time to adjust. The duration of this period is not specified in the consultation.

The consultation proposes a temporary permissions regime (TPR) for currently unregulated firms that offer products that will be subject to regulation. These firms must register for the TPR once the legislation is established and before the regulations take effect. They will then have the opportunity to apply for full authorisation in the future. While under the TPR, firms must comply with pre-contractual disclosures and other FCA rules for agreements made on or after “regulation day.”

5. Impact on lenders

Lenders must evaluate the extent of their ongoing operations concerning soon-to-be regulated credit and assess the types of authorisations they should seek. These permissions may include but are not restricted to permissions for originations, administration, and/or debt collection.

6. Credit broking

Merchants introducing customers to newly regulated agreements will remain exempt from credit broking regulation.

CUBE comment

During the pandemic, BPNL has proven to be a very attractive checkout option – the BNPL sector has almost quadrupled, with nearly £1 in every £8 spent online using BNPL. The availability of easy-to-use, interest-free credit has led to many falling into debt and succumbing to late payments. BNPL regulation is long overdue.

The UK Government’s BNPL regulatory proposal is a positive step forward in protecting consumers and reflects the core principles of the FCA’s Consumer Duty regulation.

It is evident that regulators will be heavily scrutinising BNPL providers and their inner workings including marketing materials and whether adequate checks have been implemented. Current BNPL providers, merchants, and firms such as Apple looking to add BNPL to their list of services will need to rethink how their business model can be adapted to a more regulated environment.

Firms considering business-to-business BNPL like Santander will also need to do the same. The FCA has taken a strong stance on BNPL from a consumer point of view and will not appreciate the unsecured lending aspect of BNPL in a business context either. B2B BNPL will be very popular during a time of economic turmoil where costs are high, as more firms flock to use this service, the financial risks will be uncovered, and regulators will need to step in to prevent harm.

It’s only a matter of time before global regulators pull the trigger and introduce many more regulations to tame BNPL services to further protect consumers. Regulation is on the horizon and BNPL firms should begin implementing these changes into their policies.

Stay ahead of BNPL regulations by speaking to CUBE. Our AI-driven regulatory change management solution can help your firm keep up to date with complex and ever-evolving regulatory obligations within the BNPL sector.

Keep ahead of BNPL regulatory obligations by speaking to CUBE.