The Buy Now Pay Later Consultation

The buy now pay later (BNPL) service is an ever-growing market, attracting new customers through its ability to spread the cost on purchases while potentially not having to pay interest. BNPL firms rely on minimal credit checks with lenders not being required to give key information to borrowers thus causing some people to end up borrowing more than they can afford to repay. The BNPL debate has been everlasting, especially prevalent due to the lack of regulations surrounding the service. However, the recent government consultation should change the BNPL discussion for the foreseeable future.

What is Buy Now Pay Later?

BNPL allows consumers to repay the cost of a purchase in regular installments which are interest free so long as they are paid on time. Though shoppers are not usually charged interest on their purchases, campaigners have warned that borrowers are still at risk of overextending themselves with debt and are not entitled to compensation if things go wrong, especially as firms are not yet regulated in the UK. 

Indeed, BNPL companies are largely unregulated which is especially alarming as the UK’s BNPL sector nearly quadrupled in size during the COVID pandemic to £2.7 billion. Adobe Analytics found that 12% of purchases made in January 2023, within the UK, were made with BNPL. Liz Edwards suggests that the BNPL service has been booming in the past few years particularly with the cost of living crisis. Regardless, providers usually argue that their services are less predatory than credit cards which normally charge an average annual rate of 20%. However, due to the rapid expansion of the sector (driven by the rise in online shopping during the pandemic), concerns were raised as consumers are now taking on unaffordable levels of debt. The lack of proper affordability checks and no access to the Financial Ombudsman despite the potential harm of borrowing have caused consumers substantial harm should they be unable to afford repayments. 

‘Buy now, pay later borrowing can be like quicksand -- easy to slip into and very difficult to get out of… everyday without regulation is another day people are left unprotected’

Matthew Upton (director of policy at Citizens Advice)

It is undeniable that BNPL services are helpful, benefiting individuals who take on financial planning; however, there is a fine line between utilizing its benefits and falling into the trap of which the firms prey on. A study conducted by Finder at the end of 2022 uncovered a BNPL patchwork of different approaches to affordability checks which found that 3 out of 9 of the leading BNPL services in the UK did not perform credit or affordability checks upfront before lending customers money. More frightening, consumers are unaware that they are borrowing money, and in some cases, unaware that they will be charged a late payment fee if they fail to repay on time. It is evident that urgent regulation is required for BNPL services, which debt charities are pushing for. 

Debt Charities

Debt charities have pushed for regulations by urging ministers to accelerate the legislation adoption to protect consumers from the BNPL services. Jane Goodland, trustee for the Center for Financial Capability has pushed for this legislation especially, due to the clear struggle consumers face to repay these costs. These loans currently fall outside the FCA’s regulatory umbrella due to an exemption in consumer credit laws for interest free deferred payments - a clause designed to allow non financial companies (such as dentists) to offer repayment plans. 

On Tuesday, according to draft proposals, the Financial Conduct Authority (FCA) will be able to penalize companies who fail to conduct adequate credit checks. The government is said to consult on the plans, aiming to put legislation before Parliament this year. 

The Consultation

The consultation introduced on Tuesday will look at how firms would be brought under the city regulator, giving consumers new rights to take complaints to the Financial Ombudsman under governmental plans. The FCA has said it welcomes ‘the launch of the consultation on bringing exempt buy now, pay later products into regulation. On February 14, the launch of a new 8 week consultation was introduced with compliance with FCA rules which will look at how firms would need to comply with the new ombudsman rules, including how they would need to spell out key information about loans to customers. The next stage after this consultation will be new legislation. The treasury estimates that this new regulation will now protect an estimated 10 million consumers from being ‘exposed to financial harm’. The treasury also says to work with the financial services sector to ensure credit is available to people who struggle to access it. 

‘People should be able to access affordable credit, but with clear protections in place. That is why these proposed regulations are so important. Today's summit will also help regulators and banks better understand the best ways to support people who feel boxed in by debt and open up the financial system to people who find it more difficult to access."

Andrew Griffith (economic secretary to the Treasury) 

Under these new draft proposals, BNPL services will be regulated by the FCA which will have the power to ban companies from further lending if it found them in breach of regulation. This will force lenders to conduct better affordability checks on borrowers and offer clearer information on loans. Customers are also not provided the ability to take complaints about companies to the Financial Ombudsman. In February 2022, the FCA told BNPL operators (Clearpay, Klarna, Laybuy, and Openpay) to change their contracts after identifying potential harm to consumers. However, once the FCA is given its new powers through the legislation, it will consult on detailed rules for the sector such as mandatory affordability checks, licensing of operators, and fair marketing. 

Klarna, one of the biggest BNPL lenders in the world, welcomed these reforms. Alex Marsh (head of Klarna UK), stated that the measures announced were ‘long called for’, further suggesting that Klarna is ready to proceed with the new regulations as they ‘look forward to continuing to work with the government’ to better consumer’s rights. On the other hand, Gary Rohloss (director and co-founder of LayBuy) says he is supportive, however called on the government to ensure that the new regulation is ‘proportionate’. He suggests that there should be a balance between the protection of consumers and the support for innovation and competition, further stating that BNPL services are lower risk than other forms of credit. The discrepancy between competing BNPL firms will be ever present, showcasing the priority and opinions of these businesses on the importance of consumer rights. 

The new legislation on BNPL will be introduced once the consultation has ended. It will likely rewrite parts of the Consumer Credit Act that exempts the regulation of loans under £50 as many BNPL purchases follow this trend. The law’s attitude to positively shift by protecting consumers rights in the UK showcases its ability to adapt to the ever changing economic progress of the UK. It is optimistic to see the law cater towards an inherent gap and deficiency in our current legal system by protecting vulnerable consumers through the regulation of large firms.

By

Esther Zhang