HM Treasury has announced a public consultation concerning the probable implementation of new regulation on Buy-Now-Pay-Later (BNPL) providers.
HM Treasury has opened a public consultation into the possibility of BNPL meeting new regulations. Despite the value of transactions using BNPL from main providers more than tripling in 2020, and more than 5 million individuals have utilised the service, the industry has so far remained largely unregulated.
As recommended by The Woolard Review, the Financial Conduct Authority is planning to introduce a new set of regulations to the BNPL sector to help better protect consumers from harm, whilst also ensuring fair treatment by credit firms.
Although any official announcement is yet to be made, any new regulations to the sector are expected to combat how the product is promoted to consumers and presented as a payment option, the transparency of BNPL agreements, the absence of credit assessments, the potential to garner high levels of debt, inconsistencies in the treatment of financially vulnerable consumers, and any concerning impacts on the wider credit market; including little visibility of BNPL debts on an individual’s credit file.
The HM Treasury consultation is expected to gather evidence that will be utilised to develop a proportionate approach, based on the following objectives:
• BNPL activities should be subject to an intervention that is proportionate to the level of risk that they present and is not so burdensome that it inhibits the product being offered or reduces consumer choice;
• Consumers should be adequately and fairly protected from detriment, and can access dispute resolution regarding the conduct of lenders;
• Regulation for BNPL should not adversely impact competition and innovation across the wider consumer credit and payments markets;
• Any burden on merchants offering BNPL as a payment option would be proportionate and manageable and should not disadvantage SMEs over larger businesses.
Two key parameters
In order to produce positive results from this consultation, HM Treasury must consider two key parameters.
The first is the scope of any new regulation, including the identification of exactly which types of credit agreements require additional regulation. This scope must be formed in a way that it does not have unintended consequences for valuable consumer products, but also does not allow the same consumer detriment to re-emerge from firms circumventing regulation through small changes to their business models.
The second parameter is in regards to what exact regulatory controls are to be imposed on credit agreements, an element that remains critical to ensuring a proportionate regulatory approach.
The consultation is expected to close at 11:59pm on 6 January 2022.
Industry reaction
Anthony Drury, the Managing Director of Zip – one of the fastest-growing BNPL providers in the world with 8 million customers – said: “As with any new, innovative financial product, it’s important that customers are protected by regulation, ensuring that there is clarity and consistency across the industry. This will give consumers confidence, provide retailers the opportunity to grow, and allow businesses like ours to invest and innovate in the UK. We welcome the opportunity to contribute to the development of the new regulatory framework, and we look forward to working with HM Treasury.
“If implemented effectively, it’s likely we’ll see more people using Buy Now Pay Later as a convenient part of their personal finance toolkit. In the meantime, we’ve not waited for regulation and have already put in place measures aimed at protecting and supporting customers, based on our experience of operating in other countries.”
Harry Eddis, partner and co-head of fintech at Linklaters, added: “The Treasury is taking an interesting position, one that is slightly against what appears to be the prevailing wind. While it agrees with the FCA that consumers should be protected, it does not want to regulate BNPL out of existence, evidencing perhaps a continuing desire for regulatory flexibility on business models.
“Several important pieces are still up in the air, however. For example, it is not clear how the line will be drawn around BNPL to bring it within the scope of regulation without accidentally bringing in other forms of short-term credit which the Treasury says should remain unregulated. Some careful drafting of legislation will be needed.
“At the same time, a lot of important detail has been left for the FCA to decide. These include how rules on creditworthiness assessments and pre-contractual information should apply to BNPL agreements. In the meantime, BNPL providers will be glad that the Treasury isn’t suggesting applying the full suite of consumer credit obligations to them and instead a more tailored BNPL-specific regime is likely to emerge.”
