Long reads

The Westminster Series: What to expect from the UK's BNPL regulation

Chris Holmes

Chris Holmes

Peer, House of Lords

This week the government has published plans to strengthen regulation of the Buy Now Pay Later (BNPL) market. Key proposals have been set out in an HMT Consultation response, lenders will be required to carry out affordability checks and financial promotion rules will be amended to ensure BNPL advertisements are “fair, clear, and not misleading”. Lenders offering a BNPL product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take a complaint to the Financial Ombudsman Service (FOS).

Although users of BNPL services are already covered by some consumer protection regulation (rules on advertising, the fairness of contract terms set out in the Consumer Rights Act 2015 and the unfair commercial practices elements of the Consumer Protection from Unfair Trading Regulations 2008), the scope of regulation will be extended to capture BNPL and other currently exempt agreements provided by third-party lenders and defined as short-term interest-free credit (STIFC). Further consultation is underway to establish whether they should also apply to online merchants who directly offer credit for the purchase of their own products.

One thing that does stand out in the government’s announcement is the timeline. They will publish a consultation on draft legislation toward the end of 2022 and won’t then get around to laying secondary legislation until mid-2023, after which the FCA will consult on its rules for the sector. This is a painfully slow process. Many firms in the BNPL arena want regulation and need a regulator equipped to act at speed, being responsive, positive, and able to champion both the consumer and competition.

There is no doubt that consumer preference is changing. Businesses want to be where the consumers are, and the regulators and legislators must be there too. I firmly believe in the critical importance of Parliamentary scrutiny, oversight, and meaningful involvement, not only with regards to BNPL but all financial services regulation. I look forward to the publication, soon, of the Financial Services and Markets Bill which the Treasury say will “maintain and enhance the UK’s position as a global leader in financial services having left the EU”.

Regulation is a positive thing, both for consumer protection and competition. It is interesting, and equally positive to see new BNPL actor on the block, Zopa, discussing responsible lending, thinking of ways to be beneficial to customers and being aligned with the government’s regulatory approach. They described their three tenets: the product should be advertised well (fair, clear, accurate), include credit checks, and improve financial wellbeing. The introduction of regulation creates opportunity, as seen in the auto finance market where incumbents left the market, and in independent retailers who can more easily adjust their interest rates and were able to remain profitable while complying with the new regulations.

The BNPL sector continues to grow at a meteoric rate in a landscape described as a wild west. Now that Apple has entered the BNPL space, with their Pay Later feature in Apple Pay, albeit in the US on IOS 16.4, there is an even more urgent need to get the right regulation in place before an actor with such incredible market penetration brings that to bear. It is worth repeating that the right regulation is positive for both consumer and competition.

Dame Claire Moriarty, chief executive of Citizens Advice says they have seen “a worrying two in five BNPL customers borrowing money to make repayments” and last month a spokesman for the FCA said that soaring inflation in the UK showed how important it is to act quickly to regulate BNPL.

The FCA have repeatedly spoken out on the need for BNPL regulation and will be grateful for the government announcement. As well as having concerns about the pace of change, we also need to ask if the regulator has everything they need to act on BNPL. Do they have the resources, specialism, and people they need?

Thinking beyond BNPL, do we have the regulator we need to ‘win’ when it comes to other areas, to crypto and all future finance developments? Are there lessons to learn from some of our near neighbours, such as the approach taken by the French financial services regulator? They have been much more responsive and proactive; firm, but set up to support and process at pace.  

What do we want from our financial services regulator? In order to make the most of all the vast potential of future finance, to protect consumers, to supercharge growth, what is required from us and from the FCA? Will the future regulatory framework review and the upcoming Financial Services and Markets Bill achieve the regulatory framework and regulator - equipped to act at speed, being responsive, positive, and able to champion both the consumer and competition that we need?

There is work for all of us to do here, not least when the Financial Services and Markets Bill is in Parliament, to ensure that we do enable the right regulatory framework. I would love to hear comments or responses here about any thoughts or recommendations.  As individuals, as consumers, as businesses, as Britain, we can make a success of future finance now. Right set regulation and legislation and a right resourced, peopled regulator will be absolutely essential to this.

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