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With UK buy now, pay later (BNPL) regulations looking set to be adopted by the end of the year, legal experts tell VIXIO what we can expect from a new potential framework.
BNPL has boomed in the UK and across the world as consumers cope with lockdowns and tight finances that were initiated by COVID-19.
Services offered by the likes of Klarna and Afterpay have gone from fringe payment options to mainstream checkout choices, supported by savvy branding targeting millennial consumers, who, it is claimed, are less interested in traditional forms of credit, such as credit cards.
This move to the mainstream has also brought with it a wave of regulatory activity. The United States, Australia and Europe all seem set to adjust their rulebooks to shore up consumer protection for BNPL users, which means companies that have been able to duck the regulatory requirements beset upon traditional credit institutions now face new compliance challenges.
"We are expecting the Treasury to publish responses to its consultation in the coming weeks, and are likely to know what the regulatory framework will look like by the end of 2022,” noted Katie Fry-Paul, a financial regulation associate at Taylor Wessing. “Although at the moment, we don't know how regulation of BNPL firms will be achieved, we do expect that the exemption that they currently use will be amended to bring them inside the regulatory perimeter, and that will require amendments to legislation."
For example, the UK’s Consumer Credit Act (CCA) has an exemption in place designed to allow the delayed payment of goods and services as long as that delay is time-limited and does not involve the charging of interest.
This exemption is in place to ensure that invoicing did not fall within the definition of regulated consumer credit. However, it has also provided cover for BNPL arrangements whereby goods are paid for through a number of instalments.
There is a lot to be confirmed, and there are two kinds of ways that the exemption might be amended, according to Fry-Paul, who added that both have quite significant considerations.
“In very broad terms, we are looking at either an amendment where the exemption is changed such that it won't apply to third-party lenders, which will have a broader impact than what is required or another method where the exemption is amended so that it wouldn't apply where there is an existing overarching relationship, for example between a BNPL lender and a consumer.”
The difficulty with this option, she added, is that BNPL lenders could make changes to use a different exemption. “It is not clear whether HM Treasury has a preference for either option."
BNPL's big break
“The soaring popularity of BNPL services has fundamentally changed the UK retail landscape by increasing access to affordable credit at the point of sale,” said Jayadeep Nair, chief product officer for Equifax.
For example, Equifax’s own data suggests that 28 percent of UK consumers were actively making repayments on BNPL loans in October 2021 — around 2.8m more people than at the start of last year.
“With increased use comes increased scrutiny, and it’s wholly appropriate for the Treasury and FCA to now be weighing up the right level of regulation for what has become an extremely active and exciting part of the credit market,” said Nair.
BNPL providers have a responsibility to ensure that their services do not have a negative impact on the financial wellbeing of the consumers that use them, he continued. “For all the good that BNPL can do for those that can manage their day-to-day finances, there are concerns that some users may be slipping through the cracks.”
For example, research suggests that 43 percent of BNPL users in the UK admit to having missed a repayment, with 9 percent having said it happens often.
This concern has reached the UK’s political class as well as its regulators. In November, the senior Labour politician Stella Creasy stressed that BNPL is "the true villain of Christmas" due to the debt risks that the product could unleash on consumers.
In this speech, Creasy also warned that it is a critical time for regulation and that, so far, policy change has been a slow process.
Yet, others disagree.
"I would not say that BNPL is an area where regulators have been slow to act,” said Simon Deane-Johns, consultant solicitor for Keystone Law, noting that use of the product only surged from 2020 onward, mostly due to COVID-19.
This boom took everyone by surprise, and it takes time to consider the most proportionate regulatory approach, he continued. “To have done that during 2021 is reasonably impressive given the pace at which these things usually happen.”
“The short period allowed for comments [in the government BNPL consultation] suggests that a fair amount of detail has already been fleshed out behind the scenes, and so we could see draft regulation quite quickly."
Draft rules should be expected in the first half the year, he continued, with compliance being staggered. “Marketing rules might come in sooner than in areas such as the implementation of credit checks. The latter will be the most challenging for providers to feed into their systems, so they will get more time to prepare."
"There are some rules that will be delivered pretty quickly,” agreed Fry-Paul. “The requirement for authorisation will require time to implement, similar to crypto-asset service providers' registration. It is likely that there will be a period of time here where BNPL firms can operate while waiting for authorisation."
Assessing the regulatory impact
Once BNPL firms are in the scope of the CCA, they will inevitably lose the capability to operate with light-touch requirements, which Deane-Johns suggested could lead to a dip for BNPL. "Where the existing exemption narrowed could be where the most significant impact is, resulting in the momentum being lost."
"The FCA is likely expecting the proposed regulations to slow the pace of growth of BNPL, at least where a lender other than the retailer is involved,” he said. “If you follow the FCA's approach to payday lending, they intervened at the same point in its growth."
Yet, Fry-Paul was confident that BNPL will be able to maintain its success. "There is a real possibility that BNPL could become one of the main forms of credit that consumers use. Interest-free loans from BNPL are inherently lower risk than some other forms of credit, and give customers a lot of flexibility.
“People will see BNPL as an opportunity to try before you buy, and use products like BNPL to manage their finances so they do not have to pay fully upfront,” she continued. “We will definitely see this area growing, maybe even as a result of the sector being regulated, as BNPL lenders will become more trustworthy in the eyes of the consumer."
Being regulated is not something that the sector fears, either. "Lenders that we have spoken to are looking to apply for authorisation now. They know it's coming and the FCA application process is taking a long time, so they want certainty,” she pointed out.
The consultation
If, as anticipated, new rules are introduced this year, they will derive from the public consultation that was put out by HM Treasury (HMT) in October.
Unlike the Woolard Review, which was undertaken on behalf of the UK’s Financial Conduct Authority (FCA), the government’s consultation did not conclude that consumer detriment is widespread. However, it did conclude that there is an urgent need to regulate BNPL products.
A key theme of the consultation is the amount of pre-contractual information that is disclosed, with HMT concluding that CCA rules governing the disclosure to borrowers are not adequate for BNPL, considering consumers enter into BNPL agreements online with much more regularity than traditional, and often higher-value, credit products.
The consultation suggests mandating the FCA to establish more limited disclosure standards for BNPL products than those applying to other consumer lending rules under the CCA.
The Treasury consultation paper also looks at creditworthiness assessments for purchases made with BNPL products. These are currently regulated by the FCA, meaning that providers do not have to conduct credit assessments of either new customers or for individual agreements.
The consultation closed last week, and although an HMT spokesperson did not disclose to VIXIO how many responses had been submitted, some organisations and companies have published their responses online.
For example, Klarna was largely agreeable with HMT’s suggestions, and used its response to back BNPL being included in the FCA’s financial promotions regime, as well as backing a level playing field for creditworthiness checks.
Meanwhile, Innovate Finance, the UK’s fintech lobby, called for the FCA to amend its rules for consumer credit by creating a categorisation that draws a distinction between BNPL and other forms of credit, as well as amending the Regulated Activities Order to include BNPL.
It also spoke out against making compliance a “box-ticking” process, suggesting that it would not drive better consumer outcomes.
Consumer advocacy group Which? pressed the point of stronger safeguards for BNPL users in its response.
The group said that its own research showed that consumers lacked an understanding of what they were getting themselves into, even being mistaken as a “money management tool”.
