Buy now regulate later

With HMT launching its much-anticipated consultation on regulating buy-now-pay-later (“BNPL”), it is an opportune moment to take stock of where we are, how we got here, and what to expect from the new BNPL regime.

The rise of BNPL

Over the last 18 months BNPL has seen a meteoric rise across not just in the UK, but across all major credit markets. Companies such as Klarna have now become household names and had valuations to match.

Take up has been driven by a number of factors but it’s clear that both the pandemic and the exponential growth in online shopping have pushed the use of BNPL to levels few expected in such a short period of time. As both mainstream lenders and new providers join the rush to provide BNPL, coupled with embedded finance permeating new markets (such as in the travel and fashion sectors), it’s hard to see anything other than the rise of BNPL continue at the same speed.

It’s no surprise therefore why BNPL is a such a hot topic for fintechs and regulators alike.

What is BNPL?

At its heart BNPL is a relatively simple concept. BNPL allow consumers to delay payment for a purchase until a later date. The BNPL lender will instead step in and pay the retailer, and the customer agrees to pay back the BNPL lender over a period of time (typically between 30 days and 2 months after the point of purchase). The repayment will be interest and fee-free as long as customers make their repayments on time. The BNPL lender instead makes its money by taking a cut from anything they help a retailer to sell.

Why the concern?

BNPL loan agreements will generally fall outside of regulation. In practice, this means the consumer protections in place for those using BNPL, such as the requirement to run affordability checks, are limited when compared to standard loan and credit products.

Faced with huge growth in the use of BNPL from younger users, and much media hype around its potential negative impacts, there has been strong political pressure to bring BNPL within the regulatory framework.

This culminated in the Woolard Review setting out its recommendation in February of this year that the FCA and Treasury work together to ensure that all BNPL products are brought within the regulatory perimeter “as a matter of urgency”.

What will regulation look like?

Last week the Government finally launched its consultation setting out what we can expect from the regulatory framework for BNPL.

HMT’s view is that that the risk around BNPL products is “inherently lower than an interest-bearing credit product”. As a result, they suggest the full weight of the CCA regime would be disproportionate for BNPL and have proposed what many will hope should be a more proportionate set of controls.

The key takeaways from the consultation are:

  • What is a BNPL agreement – the Government has attempted to focus on certain key features of BNPL (such the value of loans, their term and ease of repeat use) in an attempt to define it and distinguish BNPL from short-term interest free credit.
  • Credit broking – Any regulation of BNPL could be accompanied by an exemption so that merchants broking BNPL would not need to be authorised by the FCA as a credit broker (possibly subject to limited exceptions e.g. for domestic premises suppliers).
  • Financial promotions – Promotions of BNPL agreements should fall within the financial promotions regime. This would be in conjunction with the already proposed strengthening of the financial promotions regime requiring that any authorised person wishing to approve promotions should go through a gateway process managed by the FCA, where they are subject to further checks and training.
  • Pre-contractual information (PCI) – For PCI, regulation of BNPL could rely solely on FCA rules, while the detailed and inflexible requirements for information disclosure in section 55 of the Consumer Credit Act 1974 (CCA) could be disapplied.
  • Credit agreements – Mainstream consumer credit regulations are inappropriate for BNPL agreements given the particular characteristics of the product. It may be necessary to develop bespoke legislation on the form and content requirements for BNPL, which better suit the features of the product and how it is used by consumers in practice.
  • Creditworthiness and consumers in financial difficulty – The regulation of BNPL should include the application of the FCA’s rules on creditworthiness to BNPL agreements and some requirements around how firms treat customers in financial difficulty.
  • Improper execution / S.75 CCA– the CCA rules around improper execution should apply to BNPL agreement although S.75 CCA would not.
  • The FOS – customers should be able to make a BNPL complaint to the FOS.

What’s next and when?

The Treasury is asking for views on all the matters discussed above as well as a number of other issues around BNPL. Those interested will have until 6th January 2022 to submit their responses. The FCA then plans to consult on new rules in 2022 and will be developing its approach to the authorisation gateway and supervision.

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