The Government has announced that it will legislate to bring currently unregulated, interest-free Buy-Now-Pay-Later (BNPL) into Financial Conduct Authority regulation in order to protect consumers under new plans announced by the government.

The Government says that buy-now-pay-later products are rapidly increasing in popularity, with the volume of transactions tripling in 2020 as the pandemic drove online shopping, and there is now a significant risk that these agreements could cause harm to consumers. By announcing plans to legislate to bring interest-free buy-now-pay-later into regulation, the government says it is acting swiftly to ensure people can continue to benefit from these products with the right protections.

The regulation of unregulated BNPL products that are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency. The use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the beginning of the coronavirus pandemic.

The Government says that the emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm. For example, more than one in ten customers of a major bank using BNPL were already in arrears. The regulation would protect people who use BNPL products and make the market sustainable.

The announcement comes as a review of the unsecured credit market, led by Christopher Woolard, which recommends bringing interest-free buy-now-pay-later into FCA supervision.

The Woolard Review set out how regulation can better support a healthy market for unsecured lending, taking into account the impact of the coronavirus (Covid-19) pandemic, changing business models and new developments in unregulated buy-now pay-later (BNPL) unsecured lending. The Review was commissioned by the FCA Board.

Christopher Woolard, Chair of the Review, said “Most of us will use credit at some point in our lives. So, it’s vital that we have a fair market that works for everyone. New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty.”

“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.”

“Alongside these urgent issues the Review sets out a series of recommendations for how the FCA, working with partners, can build a better market in future.”

UK households have nearly £250 billion of outstanding consumer credit debt and more than 42.5 million people used consumer credit in 2019. The Review sets out 26 recommendations to the FCA, sometimes working with Government and other bodies, to make the unsecured credit market fit for the future, including:

John Glen, Economic Secretary to the Treasury, said “Buy-now-pay-later can be a helpful way to manage your finances but there is a real risk that consumers could be harmed as these agreements become ever more popular. By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”

Charles Randell, Chair at the FCA, said “Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses. While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households. Many people have been able to reduce their debts, but some of the poorest in our society have exhausted any savings or run up more debts. All the authorities which cover debt and debt advice must act together systematically to prevent problem debt and to help people get out of a spiral of debt through properly funded debt advice.”

“Regulation should be consistent and the Review shows how we can ensure high standards in consumer credit regardless of the form of credit.”

“The Review has powerful recommendations on debt advice and insolvency including on the IVA market. We are ready to work with other regulators to reduce the harm that IVAs can produce for people that use them, and to reduce the scope for unscrupulous operators to prey on vulnerable indebted people through for-profit debt packaging.”

“As the market innovates and changes, regulators and legislators need to respond quickly and decisively to protect consumers by facilitating credit where it is beneficial and clamping down on it when it does harm. The FCA agrees that there is a strong and pressing case to bring buy-now pay-later business into regulation.”

Welcoming the recommendations on Buy Now Pay Later regulation, Helen Undy, Chief Executive of the Money and Mental Health Policy Institute and a member of the advisory panel for the Review said “Proper regulation of Buy Now Pay Later is long overdue and much needed, and we urge the FCA to act on the Review’s recommendations. This credit has become increasingly easy to take out in recent years, and it’s now the default payment option for many online retailers. But the information about what happens if you miss payments is often buried in the small print and it’s hard to keep track of what you owe.”

“Many people find it impossible to understand all the terms and conditions, and to make sure that they are borrowing an amount they can afford — leaving them at risk of falling into debt if they can’t keep up. Our research shows that people with mental health problems are particularly at risk, as they might find it harder to control the impulse to spend and to understand the implications of taking this credit out.”

“Properly regulating Buy Now Pay Later credit is the first step towards addressing these problems and making this credit safer to use.”

Stephen Haddrill, Director General of the Finance & Leasing Association, said “The recommendation to bring unregulated buy-now-pay-later products within the scope of the Financial Conduct Authority is welcome. We fully support the necessary legislative changes that will be needed to bring this about, but it is essential that Government avoids a piecemeal approach, simply adding another patch to the already threadbare Consumer Credit Act (CCA).”

“Written almost 50 years ago, the CCA is no longer fit for purpose and nothing short of full reform will make it so.  Indeed, the Woolard Review notes that change will be needed to the CCA to achieve a regulatory system that is more outcomes focused, and it also recognises that much of the groundwork for that reform has already been included in the FCA’s 2019 report on the Act.”

“What we need now is Parliamentary time to review at the CCA in its entirety, with the aim of creating a workable, modern and intuitive solution that provides protection for consumers and certainty for lenders.”

StepChange Director of External Affairs Richard Lane said “This report identifies multiple ways that the regulator can help the credit market to improve to benefit consumers, and we’re particularly pleased to see a focus on how debt problems should be addressed – and avoided. If the pandemic has shown us anything, it’s revealed that it’s not only our health that is vulnerable to sudden shocks – our finances are too. Chris Woolard’s recommendations on how the FCA should reflect the lessons learned from this period and apply them to future consumer protections show insight and clarity. We very much look forward to working with the FCA to act on these recommendations, and especially to improve the practical steps that can be taken to reduce debt problems in the UK.”

Joanna Elson CBE, Chief Executive of the Money Advice Trust said “The Woolard Review is right to highlight the harm that unregulated buy-now-pay-later products can cause, and we welcome the government’s swift action today in accepting its call to bring these products under FCA regulation.”

“The broader review is a welcome step in making sure the credit market works for everyone – and we share the view that improvements are needed to reduce consumer harm.”

“We are particularly pleased to see that the Review recognises the need for secure, long term funding for free debt advice as demand increases, following the pandemic. In the wake of Covid-19, we also need a full review of debt options available to people in financial difficulty – and the government should urgently confirm a timetable for its introduction of Statutory Debt Repayment Plans, which in the future will play a key role in helping households to recover from financial difficulty.”

Caroline Siarkiewicz, Chief Executive of the Money and Pensions Service said “The proposals to bring Buy Now Pay Later under regulatory scrutiny would provide further protection for people to avoid the potentially harmful consequences of this form of borrowing which can result in people spiralling into debt. This has come at a crucial time as many people face increased financial pressures as a result of the Covid-19 pandemic.”

“We also welcome many of the proposals in the report that reflect our focus, through the UK Strategy for Financial Wellbeing, on reducing the use of credit for everyday expenses and increasing the provision of free, expert debt advice.”

“Access to affordable credit can be a lifeline for people in financial difficulty, but more work needs to be done to avoid repeat lending of high-cost credit products which may not be appropriate for people’s individual circumstances. Employer Salary Advance Schemes can also play an important role in offering low-cost alternatives to credit; and we welcome the proposal for a voluntary code of conduct to protect employees against any risks.”

Richard Barnwell, a Financial Services Partner at BDO said “Given the rapid growth in the ‘buy now pay later’ (BNPL) sector, it was almost inevitable that the pressure would grow on the FCA to bring the sector under its regulatory remit, as it has done with other forms of consumer credit in recent years.”

“The growth in BNPL has been further accelerated with the rise in online retail during the COVID-19 lockdowns and the ease with which this form of credit can be obtained.”

“The FCA will have been conscious of previous criticism that it was slow in tackling consumer harm in the payday lending sector, so is keen to move quickly to address the risks associated with unaffordable credit in the BNPL industry. This will be particularly important in the post-pandemic context in which many consumers will be at greater risk of financial difficulty.’

“In the case of payday lending, the regulatory requirements and associated costs imposed on the sector were such that many operators decided to exit the market. Due to the nature of the BNPL industry, with a comparably smaller number of dominant firms, it is likely that these firms will be more able to afford the costs of regulation, reducing the threat of operators withdrawing.”

“The Woolard review also looked at competition and recognised the lack of incentives for mainstream lenders to offer alternative credit services. Therefore while any regulations are likely to come at a cost and operators will need to ensure their businesses are sustainable by working with the FCA to address concerns around affordability, the FCA acknowledges the need for any new regulatory framework to be proportionate.”

“It will be interesting to see how the FCA will introduce regulation which deals with the potential harm to consumers, while also ensuring that the customer journey is not materially impacted given the digital nature of BNPL offerings.’

“We expect to see more on the FCA’s regulation of consumer credit in the next iteration of its business plan, due to be published in April.”

Freddy Kelly, CEO and co-founder of Credit Kudos, said “Over the past year many people have needed access to credit more than ever before and the younger generation in particular has turned in droves to Buy-Now-Pay-Later (BNPL) providers. While these products can play an important role for some people, it’s vital that no one is offered credit they cannot afford and which could cause harm.”

“All lenders have faced challenges in assessing an individual’s affordability in these uncertain times, with traditional credit reports providing limited information on someone’s current financial situation. But too often we hear of people getting into difficulty repaying BNPL loans or not understanding that this type of borrowing could affect their credit rating. The Woolard Review is absolutely right to recommend this sector comes under regulation and we strongly welcome the Government’s announcement today confirming this, bringing consistency to the lending market.’

“We are also pleased to see acknowledgment of the important role technology can play in ensuring the lending market works for consumers. We will continue to work with responsible lenders to offer enhanced credit assessments through the use of Open Banking data and ensure that only those who can afford to repay are offered credit.”

Sarah Pennells, Head of Financial Capability at Royal London said “It’s high time that ‘buy now, pay later’ deals are regulated, but the Woolard Review covers other key areas where change is needed; including credit reference agencies and access to debt advice. The Money and Pensions Service estimates that the need for debt advice will increase by 60% over the next 18  months1, because of the effects of Covid-19. It’s vital that there’s enough debt advice for people who need it but – crucially – that they have the confidence ask for help as soon as debts become a problem.”

“The Woolard Review also recommends that the FCA resumes its Credit Information Market Study, which the FCA paused last spring2. The data on our credit files is powerful, but many people don’t understand what’s on their file, or how to access their credit report. Unless the credit information market works well for consumers, and they understand their rights, they may be turned down for credit they can afford at the time they most need it.”

James Padmore, Head of Money, comparethemarket.com said “When used responsibly, Buy Now Pay Later schemes can be an effective way to spread out the payments of large purchases. However, as with any credit product, there can be problems later down the line if spending is not kept under control, and in particular there can be an attitude of ‘I’ll deal with it later’ towards these products.”

“A move to ensure a consistent regulatory framework across unsecured credit products should give people a clearer understanding across all their borrowing, and regulation should ensure they are treated fairly if they do get into difficulties.”