Calls for enhanced consumer protection against buy now, pay later (BNPL) products have been heard for years. As the government takes the first step towards this, what could the future now hold for BNPL? How else can we protect consumers?
Tuesday 14 February saw the UK government publish draft legislation to bring BNPL products into Financial Conduct Authority (FCA) regulation. The move comes over two years after the government announced its intention to regulate interest-free BNPL products (in February 2021).
The proposals mean lenders could face fines or lending bans issued by the FCA, should they fail to conduct adequate credit checks on potential customers.
For consumers, the legislation would mean much-enhanced protection when using BNPL products. The shift in rules would enable consumer complaints to go directly to the Financial Ombudsman Service, which previously was not possible as BNPL were not held to the same standards as traditional lenders.
Advertisements for BNPL products will also come under greater scrutiny, should the new rules come into play. In August 2022, the FCA warned BNPL firms that promotions must be clear, fair and not misleading. The independent regulator has attempted to address such concerns despite not regulating BNPL products. New regulatory rules for the lenders would change this.
Matthew Upton, director of policy at Citizens Advice, said: “At Citizens Advice we’ve been calling on the Government to urgently push on with regulating Buy Now Pay Later for years – this consultation has been a long time coming.
“Buy Now Pay Later borrowing can be like quicksand – easy to slip into and very difficult to get out of. As living costs continue to spiral, we know some people are using it to simply make ends meet, without being fully informed about what they are signing up to or properly protected.”
Accelerating online sales. Accelerating debt?
The pandemic accelerated the uptake of online shopping and, perhaps indirectly, of BNPL offerings. According to The Office for National Statistics (ONS), seasonally adjusted internet sales in May 2022 accounted for 26.6 per cent of official retail sales, compared to only 19.7 per cent in February 2020.
The online shopping rise has also seen greater numbers of BNPL offerings. ‘Small’, interest-free deferred repayment schemes have been, and currently continue to be, exempt from FCA regulations.
As a result, many consumers have been enabled to rack up large levels of debt using BNPL offerings. Unexpected late payment fees have hit some people, while others have taken on higher amounts of repayments than they can actually afford.
These issues may continue to grow, worsened by the current cost of living crisis in the UK. A recent report by personal finance experts at NerdWallet, found that 47 per cent of UK consumers in debt believe they will need to take on more debt while they pay off existing debt. This suggests that the number of consumers relying on BNPL could continue increasing.
Stewart Perry, director of financial education charity The Centre for Financial Capability, explained why people have turned to BNPL.
“Our recent research shows that people are now turning to such schemes as they struggle with worsening financial anxiety.
“More than half (51 per cent) of 18 to 34-year-olds and almost 20 per cent of over 65-year-olds used BNPL services – an increase of over 40 per cent from last year.
“Our research also shows that amongst those who have used or intend to use BNPL services, more than a quarter (27 per cent) said this was or will be due to the current increase in the cost of living and inflation.”
‘Proportionate regulation’ for BNPL
While BNPL firms would undoubtedly feel increased regulatory pressure given the changes, many have already recognised the need for such legislation to level the playing field, and to ensure customer safety.
Philip Belamant, CEO and co-founder of BNPL provider Zilch, welcomes regulatory changes for the space: “In the context of the cost-of-living crisis, it’s never been more vital for people to have access to interest-free credit, via responsible organisations that carry out appropriate affordability checks and enable others to do the same through reporting via the major UK Credit Reference Agencies (CRAs).
“We hope that today’s announcement will spur the acceleration for proportionate regulation in both the BNPL and wider credit lending ecosystem, creating a responsible and sustainable environment for customers in the UK and, perhaps, a blueprint for regulators and governments around the world to learn from and replicate.”
Gary Rohloff, managing director and co-founder of BNPL firm Laybuy, explained the company’s take on the regulatory changes.
Rohloff said: “We have always supported proportionate regulation of the BNPL sector. We need a regime that protects consumers but one that strikes a balance and supports innovation, competition and reflects the lower risk and average purchase size compared to other forms of credit like store cards or credit cards.
“From the very start we have always conducted credit checks and we were the first BNPL to begin sharing data with CRAs too. So we are happy to engage with the government on the next steps to make sure we get the right regulation.”
Is eventual FCA regulation enough?
Although new regulation would increase consumer safety when dealing with the buy now, pay later sector, a feeling that more should, and can, be done remains.
Tom Voaden, head of partnerships at fintech BR-DGE, explains the need for BNPL firms to take the initiative in supporting consumers. Voaden said: “It is clear that consumers need greater support during the cost-of-living crisis.
“Forward-thinking BNPL providers should put their best foot forward and consider what steps they can take to support customers before any regulation takes effect. This could be through adapting their checkout experience to better signpost repayment terms, supporting related consumer education initiatives or working more closely with UK CRAs.
“Market players that take a consumer-first approach will be in a stronger position to navigate their new set of responsibilities and reinforce their credibility in an ever-competitive market.”
Craig Wilson is head of private sector for consulting and digital services company Sopra Steria. Wilson’s views appear to mirror that of Voaden, saying that BNPL platforms have more responsibility – which many have been shirking.
Wilson said: “Despite usage increasing, many consumers don’t understand how these schemes truly work, or that they’re getting themselves into debt in the first place.
“Buy now, pay later platforms, therefore, have a responsibility to educate consumers on the terms and conditions they’re agreeing to, and the potential consequences of using these services.
“We need greater collaboration between the public and private sector, to devise a regulatory framework that constantly keeps consumers front of mind.”
As the government begins introducing BNPL regulation, and as consumers wait months for it to come into effect, lenders may well need to step up to protect them in the meantime.