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Buy now, pay later (BNPL) products offer better opportunities to consumers, but the risks of potential harm need to be monitored, a senior official at the UK’s Financial Conduct Authority (FCA) has said.
“We need to revisit the boundaries of what is and isn’t regulated credit as new products develop and consumers’ use of them changes,” said Nisha Arora, director of consumer and retail policy at the FCA, while speaking at the Westminster Business Forum.
BNPL has risen to prominence following the success of such fintech companies as Sweden’s Klarna and the Manchester-based Clearpay.
A survey earlier this year by UK consumer group Which? estimated that one-third of the UK’s population has now used BNPL products.
Participants in this market have previously told VIXIO that they do not expect activity to level off when coronavirus subsides, and therefore regulators are beginning to look up and pay attention.
To regulate BNPL, the FCA needs to take a holistic view of markets, acting assertively on harm around the edges of the UK’s regulatory perimeter, regulating according to what consumers need and use in the real world, said Arora, noting that the FCA expects the UK government to consult on a proposed regulatory framework in the next few weeks.
Once this has been announced, the FCA will consult on its own strategy.
Earlier this year, Chris Woolard, a former chief executive at the FCA, published his review into the unsecured credit market.
This review signalled several risks with the current lack of regulatory framework for BNPL products.
For example, many consumers think that the sector is already regulated and that they can file complaints with the UK’s Financial Ombudsman. Some consumers also do not view it as a form of credit, and the lack of affordability checks and ability to use multiple different lenders means the potential to create indebtedness.
Woolard said there was “an urgent need to regulate all” BNPL products. He noted that although such products provide “a meaningful alternative to payday loans and other forms of credit”, they also “represent a significant potential consumer harm”.
The FCA is increasing its focus on consumer outcomes and needs, particularly for those in vulnerable circumstances. As part of this, the FCA is bringing to bear its new, more innovative, assertive and adaptive approach.
“We need to ensure our regulation adapts to the changing market environment. When we think back to how different consumer credit was five or ten years ago, it underlines the importance of adaptive regulation that can respond and develop as the market does,” said Arora.
In particular, the FCA’s proposed consumer duty will set the standards for firms in all retail markets, including consumer credit, as well as payments.
Through the consumer duty, firms will have to have a greater focus on consumer outcomes and act to enable these.
According to Arora: “They will need to test what happens when consumers use their products and services, and if credit products are causing financial harm or aren’t delivering the right outcomes, firms will need to fix this.”
BNPL has become an increasingly political issue in the UK. John Glen, economic secretary to the Treasury, said that his officials are exploring policy and legislative options with the FCA and that he intends to “take forward the necessary legislation as a matter of priority”.
Last year, Stella Creasy, a Labour member of parliament, called for HM Treasury to require the FCA to regulate BNPL through a backbench amendment to the Financial Services Bill.
However, this was ultimately voted down after failing to get government support.
