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The uncertainty surrounding Buy Now Pay Later regulation

20 March 2024

In this article we take a look at Buy Now Pay Later products and why regulation in this area continues to be postponed with no clear indication as to when a response to the last consultation will be provided.

On 2 February 2021, the government announced its intention to regulate Buy Now Pay Later (BNPL) products. Further to this announcement, the government consulted on policy options in 2021. More recently in February last year, the government issued a further consultation, with the stated ambition to bring final legislation before Parliament prior to 2024. However, despite this intention, plans to move forward regulation in this area continues to be postponed with no clear indication as to when a response to the last consultation will be provided.

In a recent interview, Chancellor Jeremy Hunt confirmed that BNPL regulation is still set to go ahead, but that the government is being careful not to be too 'heavy handed' with the new rules. This announcement appears to support suggestions that the government's regulatory plans are being postponed until after any upcoming general election, as a result of pressure from BNPL providers to water down proposals and in order to prioritise more popular policies. 

Indeed, the idea that additional regulation may cause providers to drop out of the BNPL market may have legs, with NatWest recently confirming they will be closing their BNPL proposition with an intention to focus on 'core lending products, helping customers spread the cost…through our credit cards, overdrafts and loans.' It is unclear if this is a direct reaction to the impending regulation or simply a lack of uptake of the offering by its customers, but is an indicator that providers will exit the market if they do not consider it right for them.

As a result, there continues to be uncertainty for both providers of BNPL products and users of the products as to how and when these products will be regulated in the UK. 

What are Buy Now Pay Later (BNPL) products?

BNPL services allow consumers to make purchases and spread the cost over a series of instalment payments, often with little to no interest. These services are typically offered by third-party providers who partner with merchants to offer their payment solutions at the point of sale, both online and in-store. The appeal of BNPL lies in its simplicity and transparency, offering consumers a clear repayment schedule and often instant approval decisions. In recent years, the BNPL industry has surged in popularity, offering consumers an alternative to traditional credit cards by allowing them to make purchases and spread payments over time without incurring interest. 

BNPL services in the UK currently operate within a regulatory framework that differs from traditional credit services. While credit cards are subject to stringent regulations aimed at protecting consumers and ensuring responsible lending practices, BNPL services have faced fewer regulatory requirements.

One of the primary concerns surrounding BNPL is the potential for consumers to accumulate debt beyond their means. Unlike credit cards, which typically have credit limits based on an individual's creditworthiness, BNPL services may offer flexibility in repayment terms without thoroughly assessing a consumer's ability to repay. This lack of assessment could potentially lead to financial hardship and poor customer outcomes, particularly for vulnerable consumers. 

This concern is heightened when considering the data around BNPL product usage in the context of the cost of living crisis within the UK. As reported in the Financial Times, a recent survey by the Centre for Financial Capability showed that one third of adults in the UK have used BNPL in the past (rising to 40% for the 18-34 age group), and that 22% of users missed at least one repayment in H2 2023. It also highlighted that 21% of those surveyed were not clear on the repayment fees they would owe on missing a repayment or the impact on their credit score.

Regulation proposals 

As referenced above, HM Treasury (HMT) published its consultation early last year on proposed draft legislation, which would bring BNPL products into the regulatory perimeter. One area of focus highlighted was improving transparency and disclosure practices within the BNPL industry. Clear and comprehensive information about fees, charges, and repayment terms is essential for consumers to make informed decisions about their finances. These changes would apply to both contractual information and promotional material prepared, although it is worth noting that much of the marketing for these products is already subject to the FCA Financial Promotions regime despite the products themselves being unregulated. This ties into the FCA's wider focus on consumer understanding, seen most prominently within the new Consumer Duty obligations but also within the FCA's rules on approving financial promotions 

Another aspect under consideration is the implementation of creditworthiness assessments for BNPL transactions, with the FCA detailing that they will develop a tailored approach to applying current rules for BNPL agreements. Given that the success of BNPL is in part due to its simplicity when making a purchase, it will be particularly interesting to see how any additional friction due to new regulation fundamentally impacts the nature of the product.

Furthermore, regulatory oversight would extend to governance and risk management practices within BNPL firms. Robust internal controls and compliance mechanisms would be required as with other regulated firms to mitigate operational risks and safeguard consumer interests. BNPL providers would also find themselves under the Financial Ombudsman Services' (FOS) jurisdiction and therefore would need to effectively implement their complaints and redress processes accordingly. 

In conclusion, the regulatory landscape with regards to BNPL products remains unclear. Whilst the intention and ambition to regulate these products is clear, questions around timelines and scope remain. Firms which will be impacted should nonetheless be actively considering the ramifications of being a regulated firm, alongside any current activities which may be caught under the regulatory perimeter, for example advertising their BNPL products. In light of the recent updates to the financial promotions regime, firms advertising these products should be ensuring their promotions are signed off by an FCA authorised person and therefore, should be considering the current need for FCA authorisation or third party services.  

DWF's Regulatory Consulting team have extensive experience in undertaking financial promotions work. We are familiar with the new standard which will be expected by the FCA for financial promotions, having advised on a lot of regulatory change, including the Consumer Duty. We can advise on your process, address any shortcomings and deliver training to staff and/or senior management on the topic and check that you have the correct controls and monitoring procedures in place to not fall foul of the rules. 

Additionally, we also have a wealth of experience in preparing FCA applications and notifications and therefore, are equipped to support you should you need support in applying for authorisation.

Contact us today if you need any advice or guidance.

Further Reading