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2023 was supposed to be the year that the UK government introduced regulations for the buy now, pay later (BNPL) industry. However, the UK industry enters 2024 in limbo, even as other jurisdictions jump ahead.
“Changes are urgently needed to bring BNPL into regulation to protect consumers, to ensure that there is secure provision of debt advice to help all those who may need it, and to maintain a sustained regulatory response to the pandemic,” said Christopher Woolard, former Financial Conduct Authority (FCA) chief, in 2021.
Woolard was fresh from having published his review of the nascent market, and this review would spur on campaigners such as media personality Martin Lewis and Labour MP Stella Creasy, who once referred to BNPL as at risk of being “the true villain” of Christmas.
Even BNPL firms themselves, such as Klarna and Zilch, have been keen to emphasise that they are pro-regulation. Zilch, for example, secured a consumer credit licence with the FCA in November 2020.
And yet, 2023 is another year in which legislation was not passed. This is despite the fact that the UK government consulted on the legislative proposal in early 2023.
“It may just be that this isn't a priority for the government,” said Simon Deane-Johns, a partner at Keystone Law. “It is not for lack of parliamentary time, as the government hasn't done much, and MPs say parliament often stops sitting early. The government is busy elsewhere."
Dean-Johns continued to consider whether the government was worried about an interruption to consumer spending at Christmas. “BNPL regulation would create friction for low earners. They may also be concerned about any interruption to retail, as the economy is flatlining."
"BNPL is not regulated in the way that we thought that it might be at this stage, with the exemption which allows BNPL credit to be provided by unregulated lenders still in place,” said Katie Fry-Paul, an associate at Travers Smith.
However, the fintech lawyer pointed out that is not to say that BNPL is entirely unregulated.
“BNPL businesses operating in the UK (or providing services to UK customers) still have regulatory requirements that they have to comply with,” she said.
This is most notably with regard to financial promotions: promotions relating to exempt credit agreements which are made by a business not authorised by the FCA that have to be approved by an authorised firm.
In addition, the FCA has harnessed the tools it currently has to take action in the BNPL space. For example, it came to agreements on BNPL contracted with QVC and PayPal earlier this year, echoing previous work with lenders Klarna, Clearpay, Laybuy and OpenPay.
"Businesses, generally, would rather have regulatory certainty than exist in a space where they are unregulated but unsure where they will stand in the future,” said Fry-Paul.
“Regulatory certainty helps them to plan, and firms need it to continue to innovate and invest in the UK. It seems clear that the regulation of BNPL will happen in future at some point, but businesses would be glad for the shape of that regulation to be confirmed."
For Deane-Johns, uncertainty generally is not a good thing.
“The UK is losing its reputation for efficiency in the legislative process,” he warned. “We have had big delays around this and crypto, and the payment services consultation process has been slow as well.”
According to the lawyer, these sorts of consultation processes used to be fairly brisk. “An initial consultation followed by three to six months of responses, a summary of consultation, and then proposed regulation laid before parliament.
“These days, we're instead seeing several consultations around just an intent to regulate."
For now, Fry-Paul said that BNPL businesses are preparing, as best they can, on the basis that the amendments that will bring BNPL within the regulatory perimeter will go ahead as consulted on.
“Many businesses are already working with credit reference agencies and looking more closely at appropriateness,” she said. “There has also been an interesting shift in communications with customers, and businesses appear to be really making sure that customers know what they are signing up for."
However, Fry-Paul added that there is a lot of detail still to come, which will be in the form of FCA rules and guidance and will follow once secondary legislation is passed.
“For now, it does seem likely that BNPL is no longer on top of the government's priority list, although this might be expected to be reversed if there is a change in government in 2024,” she said.
BNPL regulation elsewhere
Despite UK plans appearing to stall, elsewhere it has been a hot topic for regulators.
In the EU, for example, the Consumer Credit Directive has now been amended and will account for BNPL agreements. Meanwhile, BNPL agreements have been exempt from the EU’s Payment Services Directive and Payment Services Regulation (PSD3/PSR).
In July 2023, jurisdictions such as New Zealand and Qatar also unveiled plans to bring the product under regulatory oversight.
In the US, the Office of the Comptroller of the Currency (OCC) issued a bulletin in December to assist banks in effectively managing risks associated with BNPL lending and in responsibly offering BNPL loans.
The financial regulator has said that it expects banks that offer BNPL loans to do so in a manner that is "safe and sound, provides fair access to financial services, supports fair treatment of consumers, and complies with applicable laws and regulations".
Some jurisdictions have further introduced a code of conduct for BNPL firms. This includes Singapore, where all BNPL providers are signed up to a code developed by the fintech industry and the Monetary Authority of Singapore.
In the Netherlands, the Dutch Authority for the Financial Markets (AFM) published a statement on the code of conduct signed by four providers of BNPL services in the Netherlands.
From October 30, 2023, the four providers in the country — Billink, Klarna, in3 and Riverty — agreed to be subject to more stringent requirements on transparency and consumer protection.
The measure comes as a result of the AFM's 2022 report on the risks related to the BNPL industry in the Netherlands.
However, although greeting this as a great first step, the Dutch Ministry of Justice has said that the code does not come up to standard with the EU’s incoming consumer credit regulation.
Vixio has updated a previous version of this article to reflect Zilch's regulatory status and to clarify that the FCA secured agreements with Clearpay, Klarna, Laybuy and Openpay.
