BNPL consultation launched by HM Treasury

22nd October 2021

HM Treasury has launched a consultation on possible Buy Now, Pay Later (BNPL) regulation.

The consultation is seeking views to inform the scope and nature of the regulation, but the document suggests that some existing regulation can be applied to BNPL. and picks up on all the most important elements that can cause consumer detriment.

The consultation recognises that the frictionless process so valued by retailers to achieve smoother sales and increased volumes can be a driver of harm for some consumers, and makes pre-contractual disclosure and ongoing consumer protection so important.

The Woolard Review, published in February, identified areas of potential consumer detriment as the market grows, including poor consumer understanding of products, a lack of affordability assessments and inconsistent treatment of people in financial difficulty. There are also concerns about the potential to create high levels of indebtedness with some people making multiple BNPL purchases. The Woolard Review recommended that BNPL be brought within the scope of Financial Conduct Authority (FCA) regulation and, alongside this, the Government announced its intention to regulate.

Debt charity StepChange says that it argued these points to the FCA’s Woolard Review last year. That review resulted in the FCA’s recommendation, and the Government’s agreement, to regulate BNPL. Today’s consultation marks a watershed in the recognition that BNPL is credit, with implications for the need for adequate consumer protection against harm, matching existing Consumer Credit Act and Financial Conduct Authority protections.

The debt charity says that while the precise scope and nature of protection is under consultation, the fact that this important principle will underpin the future of the BNPL market should help to offset the risk of unnecessary additional debt problems that could arise from the rapid acceleration of the BNPL market.

Commenting on the Treasury’s BNPL consultation  Peter Tutton, StepChange Head of Policy, Research and Public Affairs, said “We look forward to contributing our formal response to the consultation, but already we can see that the Government is taking seriously its promise to regulate the BNPL market, and recognise that BNPL is credit, which has the potential to cause harm without adequate consumer protections.”

“Where there are some important choices to be made – such as how widely the definition of BNPL should be drawn, and what the regulatory position of retailers should be – we would like to see the protection of consumers being the first and guiding principle of the final framework. We hope the introduction of regulation can be implemented at pace, given the rapid rise of BNPL.”

Jayadeep Nair, Chief Product and Marketing Officer at Equifax said “In just a couple of years we’ve seen Buy Now Pay Later (BNPL) go from being a niche payment option used by just a handful of early adopters, to become a major feature of the UK credit market. It’s not often that such a habit-shifting innovation comes along in the world of finance, so this is an incredibly exciting time for the sector, and a change that the Treasury is rightly determined to get right.”

“At Equifax, we welcome the Treasury’s consultation, and are supportive of the drive to make the UK the world’s first major market to regulate BNPL in this way. Given the anticipated growth in this newer form of credit, we believe it is important that we as an industry evolve and adapt in a positive way to ensure that consumers are well informed and protected, and that the emerging data and insights are used to fuel the next generation of fintech innovations.”

“BNPL differs from many traditional lending products, but it is no less fundamental that consumer data and borrowing behaviour is reflected in credit files. As one of the UK’s leading credit reference agencies (CRAs), we know that the more insights lenders have available, the more confidently and accurately they can undertake affordability assessments, lend with confidence, and ensure fair outcomes for consumers.”

“Equifax is already working with a number of fintechs and BNPL providers to help them prepare for the expected changes while maintaining the features that make their products so popular. Confidence in the credit system is fundamental to the UK’s economic recovery and we are committed to working with the Government, the FCA, BNPL providers and consumer groups to make sure that when the change happens, consumers are fully aware of the implications of BNPL products on their credit standing.”

Matthew Upton, Director of Policy at Citizens Advice, said “Buy Now Pay Later borrowing can be like quicksand – easy to slip into and very difficult to get out of.”

“Split payments are offered as a temptation at the checkout, but the consequences can be devastating for those who are least able to deal with them. We’ve helped many who have slipped into trouble, including one sent a debt collection letter over a £10 purchase. Another relies on Buy Now Pay Later to buy things such as their children’s school uniform, but cannot afford the repayments.”

“Over half of young people who have used Buy Now Pay Later in the last year struggled to make a repayment. The Buy Now Pay Later sector has grown incredibly quickly and we need consumer protections to keep pace. We welcome the Treasury’s commitment to regulate the sector. Now it must be swiftly translated into action.”

Citizens Advice’s recent BNPL report into the sector found that one in ten BNPL shoppers have been chased by debt collectors in the last year with this rising to one in eight young people. Whilst BNPL shoppers were charged £39 million in late fees in the past year.

Kevin Still Director at DEMSA said “One of the major considerations and questions in the consultation is around whether merchants offering BNPL as a payment option would need to become limited permission credit brokers. The government’s view at this stage is that any regulation of BNPL could be accompanied by an exemption so that the broking of BNPL credit by a merchant would not lead to a requirement that the merchant is subject to regulation as a credit broker. The control of financial promotions involving the merchant and BNPL provider has been considered building on the work by CAP in December 2020.”

“DEMSA believes that proportionate regulation of BNPL providers, setting aside some of the more onerous Consumer Credit Act requirements, but with the inclusion of key aspects of CONC, will provide the right level of consumer protection. There also needs to be streamlined path for unregulated firms to obtain the required permissions and the FCA will need to issue their consultation after this one. Whether ‘interim permissions’ are granted remains to be seen, as they did for OFT regulated firms coming across in April 2014.”

Jason O’Shaughnessy, Head of International Business at Envestnet | Yodlee, said “Responsible lending needs to be at the heart of all buy now pay later products. Affordability assessments should be built into any purchase that consumers make at check-out to determine if someone can afford to take on credit. To enable people to manage their financial health, it would act as a safety buffer against people with debt issues from taking on credit they can’t afford and stopping them from falling into unnecessary debt. BNPL providers are able to take advantage of open banking connections to provide them with real-time information from banks and lenders. This is another real-world example of using open banking as solution to lending responsibly.”