What’s next for Buy Now Pay Later: HM Treasury launches consultation

Recap

Alongside the rise in popularity of BNPL products, regulators have become increasingly concerned that BNPL is a form of credit which attracts all of the issues faced by other, more standard forms of credit (for example, ensuring that the credit is affordable for borrowers). But, whilst traditional lenders are subject to consumer credit rules imposed by the FCA and the requirements of the Consumer Credit Act 1974 (CCA), many BNPL arrangements are not.

On 2 February 2021, the FCA published the Woolard Review which reported on change and innovation in the unsecured consumer credit sector. The report concluded that customers have a tendency not to view BNPL as a form of credit (or to consider the risks associated with it) and affordability checks are often not carried out. At the same time, as the report highlighted, the value of transactions using BNPL from the main providers more than tripled in 2020. Accordingly, the report recommended that BNPL products should be brought within the scope of the regulatory regime.

Key takeaways from the consultation

Some of the key changes which the government is considering under the consultation are:

• bringing the advertising and promotion of BNPL arrangements within the financial promotions regime;
• providing for the FCA to supervise lenders' pre-contractual screens to make ensure customers get clear information on the negative consequences of taking out credit, like arrears fees and debt collection;
• requiring lenders to adhere to the lighter touch FCA requirements around adequate pre-contractual explanations, but not applying the full CCA pre-contractual information rules to BNPL products;
• requiring lenders to carry out creditworthiness or affordability assessments to look at the credit risk to the lender plus whether the customer can afford to repay;
• applying the FCA rules on arrears, default and forbearance with requirements on how BNPL providers should treat customers in financial difficulty or communicate with borrowers who have missed payments, along with the CCA information requirements for customers in financial difficulty which give warnings to borrowers that a firm might take action against them and provide an opportunity for them to respond; and
• introducing an equivalent to Section 75 Consumer Credit Act protection which allows customers to claim against the credit provider instead of the supplier in certain circumstances.

What’s next?

In response to the consultation, Innovate Finance (the industry body representing the FinTech community in the UK) published a statement which stressed the need for certainty and clarity on the regulatory approach, to enable credit providers and retailers to develop products and services with confidence. This requires a clear timetable for the development of the regulatory regime which supports continued innovation. As pointed out in the statement, the market will continue to develop in the absence of a new regulatory regime, and this will potentially make the application of new regulation more complex.

The consultation closes on 6 January 2022. Following the consultation, the government will provide a summary of responses and will set out next steps for its work on regulation of BNPL.

BNPL is a great example of the increasing trend of “embedded finance” and how new fintech models can capitalise on demand for products which help consumers manage their finances more easily. Whilst it is important that consumers are protected as these arrangements become more popular, as ever, regulation needs to find a balance between protecting the potential harm to consumers and fostering innovation in financial services, and how these services are consumed or utilised by the consumer. On the whole, with meaningful engagement by HM Treasury with industry on this consultation, the proposals set out lay promising foundations for a sensible and proportionate regulatory approach.

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