Buy now, pay later (BNPL) services have become significant in the realm of short-term unsecured consumer finance, often tied to specific products and offering instalment repayments, without accruing interest. The BNPL transaction involves three key players: the consumer, the merchant, and the BNPL service provider.
Despite the similarities with traditional credit products, there is an ongoing discussion about whether BNPL services should be subject to comparable regulatory measures.
Here Akshata Namjoshi, associate partner, and Ratul Roshan, senior associate, at legal consulting firm KARM Legal Consultants, explore the evolving regulatory landscape of BNPL services in the United Kingdom, Australia, Ireland, and the United Arab Emirates (UAE).
In the UK, BNPL products currently benefit from an exemption under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. To qualify for this exemption, providers structure their services according to specific conditions, such as fixed sum credit, a maximum of twelve payments within twelve months, and interest-free credit.
This regulatory framework allowed BNPL services to thrive, resulting in a surge in their usage. However, recent reviews, including the Woolard Review and the His Majesty’s Treasury Review, prompted a re-evaluation of the existing regulatory stance.
The reviews identified important learnings and raised concerns that required addressing. In response to the learnings, a consultation on draft legislation to regulate BNPL services was issued in February 2023.
The proposed legislation aims to remove the blanket exemption enjoyed by BNPL products, signifying a departure from the current regulatory position. The focus is now on introducing limited and proportional regulation while considering BNPL services as a cost-effective means for consumers to access flexible credit.
The proposed changes aim to strike a balance between consumer protection and fostering innovation within the BNPL sector. While the draft legislation is under scrutiny, the trajectory suggests a shift from a lenient regulatory approach to a more structured framework that acknowledges the importance of regulating BNPL services without stifling their growth.
As of now, Australian BNPL providers are practicing self-regulation through a ‘BNPL Code of Practice’ (Code) by Australian Finance Industry Association. Although the Code has not been promulgated as a legislation, it includes progressive provisions related to consumer protection, such as appropriate disclosure obligations on scheduled payments, late payments, and changes to product terms and conditions. Additionally, it outlines hardship provisions with contract variation options available to consumers, reflecting a commitment to responsible lending practices.
Despite these industry-led efforts, a consultation conducted by the Assistant Treasurer and Minister for Financial Services of Australia in 2022 identified concerns similar to those raised in the UK. These concerns included automatic spending limit increases, a lack of streamlined options for consumers to raise complaints or request hardship assistance, and unclear terms in BNPL contracts. In response to these concerns, Australia is considering a shift in its regulatory approach.
The proposed regulatory changes would bring BNPL services under the purview of the National Consumer Credit Protection Act 2009, treating them as credit and necessitating BNPL providers to obtain an ‘Australian Credit License’ issued by the Australian Securities and Investment Commission. This marks a significant departure from the current self-regulatory environment, signalling a move from low regulation to a more structured regulatory framework.
In Ireland, BNPL providers initially operated outside the supervisory purview of the Central Bank due to the interpretation that interest-free deferred payment structures fell outside the definition of “credit” as set out in the Central Bank Act 1997 (CB Act). However, regulatory oversight increased with the introduction of the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022 (Act).
This Act broadened the definition of “credit” under the CB Act, incorporating ‘deferred payments’ and ‘other comparable financial arrangements’ in addition to cash loans. The inclusion of BNPL service providers under this extended definition subjects them to higher regulatory thresholds.
BNPL service providers are now classified as ‘Retail Credit Firms’, obligating them to assess the suitability of their products for consumers and evaluate the consumer’s ability to repay the debt over the agreement’s duration. Furthermore, credit providers are now bound by a maximum Annual Percentage Rate of 23 per cent.
This regulatory shift in Ireland signifies a move from minimal oversight to a more comprehensive regulatory approach, aligning with the global trend of increasing scrutiny on BNPL services.
United Arab Emirates (UAE)
In the UAE, financing activities were covered under Resolution No. 58/3/96 Regarding the Regulation for Finance Companies (FCR). However, this regulatory framework catered to the traditional finance companies and did not factor in BNPL services.
Under the recently amended FCR in 2023, pay-later service providers in the UAE now fall under the category of ‘Restricted License Finance Companies’ (RFC). This transition marks a departure from stringent regulations applicable to traditional finance companies, providing BNPL services with a more lenient and suitable form of regulation.
BNPL service providers are now required to be licensed as RFCs authorised to provide ‘Short-Term Credit’. The credit can be provided for a period not exceeding twelve months for the specific purpose of purchasing goods or services, without interest, collateral, or security deposits.
The regulatory changes also introduce measures aligning with global regulatory trends for BNPL products, such as mandatory affordability assessments, ceiling limits on credit extended to borrowers, and caps on maximum fees chargeable to borrowers. These measures aim to reduce the likelihood of consumers accumulating debt without considering their financial situation, enhancing consumer protection when utilising BNPL services.
The global evolution of BNPL regulation reflects a delicate balance between fostering financial innovation and ensuring robust consumer protection measures. While BNPL products offer essential access to affordable credit, the regulatory approach varies across jurisdictions.
The ongoing regulatory developments highlight the need for a flexible and proportionate approach to BNPL regulations. Striking the right balance is crucial to safeguard consumers without stifling the growth and accessibility of BNPL services. As BNPL services continue to evolve, regulatory frameworks must adapt to the dynamic landscape of consumer finance, ensuring that the industry remains innovative and accessible while prioritising consumer protection.