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The plans for regulating Buy-Now Pay-Later are becoming clearer. Retailers and lending business will need to plan for the new regulation, its business and customer impacts and how to comply. 

The UK Government has published its consultation on the Regulation of Buy-Now-Pay-Later (“BNPL”) products. The Consultation is a response to the growth in use of BNPL to purchase lower-value consumer goods. As a result, BNPL lenders will need to be authorised by the Financial Conduct Authority (“FCA”) and comply with conduct rules about how products look and work. Rules around lending decisions and customer arrears are also under consideration. 

The Consultation says it is intended to strike a balance between ensuring consumers have appropriate protection when using BNPL and access to useful financial products.  

The prospect of further regulation for BNPL will have consequences for merchants, BNPL finance providers, and the consumer.

1.   CONSUMER DETRIMENT FOCUS 

The Consultation was launched in response to the Woolard Review, which the FCA published on 02 February 2021. The Woolard Review focussed on concerns about the potential for greater risk to consumers when using BNPL agreements compared to other financial agreements, particularly in the context of it being currently unregulated in the UK. 

The Consultation recognises that to date, evidence of wide-scale of consumer detriment has not materialised. The Consultation attempts to draw the scope of regulation to those aspects of the BNPL model which the Government views as being most likely to harm consumers.

2.   SIMILAR INTEREST-FREE PRODUCTS: DRAWING REGULATORY LINES 

As well as BNPL, other short-term interest-free credit (“SIC”) financial arrangements, currently fall under the same exemption from regulation as BNPL. SICs can be made by retailers or third party lenders and include interest-free instalment loans that are repayable in under a year. These are often used for white goods, electronics, furniture and dental procedures, as well as monthly payments for club memberships and season tickets. 

The Consultation states that regulatory controls should be imposed on BNPL agreements, but that it is difficult to define the scope of regulations given that SICs share some, but not all, of the potential risks for consumers as BNPL. There is a question about whether or to what extent some or all SICs should be regulated in the same way. 

Some proposed options to scope the new regulation include: 

  • restricting the extension of regulation to short term interest-free credit agreements where there is a third-party lender involved in the transaction, and keeping arrangements directly between a retailer and a consumer exempt from regulation; or 
  • defining a BNPL agreement as one where there is a pre-existing, overarching relationship between the lender and consumer, under which the lender agrees to finance one or more transactions on a fixed sum credit basis.


3.   CONTROLS: RISK PROPORTIONALITY 

    The Consultation recognises that the risks of BNPL agreements are “inherently lower than an interest-bearing credit product” and that over-regulation can limit consumer choice and innovation. It suggests that: 

    • BNPL regulation is proportionate to the level of risk that they present and is not burdensome; 
    • Consumers are adequately and fairly protected from detriment and can access dispute resolution; 
    • Regulation for BNPL does not adversely impact competition and innovation; and 
    • Small and Medium Enterprises (“SMEs”) are not disadvantaged over larger retailers.
     

    4.   KEY POINTS FOR BNPL PROVIDERS 

    The Consultation recognises that BNPL agreements can benefit consumers. To protect consumers from potential risk it proposes that: 

    1. Financial services rules may govern marketing content;
    2. Mandatory pre-contractual information may need be provided to consumers;
    3. The form and content of BNPL agreements would be dictated by law;
    4. The FCA’s current rules on creditworthiness assessments may apply to BNPL agreements; and
    5. Requirements around how BNPL firms treat customers in financial difficulty may be introduced. 


      A potentially significant (and costly) development is the prospect of increased costs relating to dispute resolution. The Consultation proposes that BNPL-related customer complaints can be referred to the Financial Ombudsman Service (“FOS”). Currently the FOS charges each respondent £750 per complaint (from the 26th complaint submitted onwards). This greatly exceeds the acknowledged average value of a BNPL transaction, which can range from £50 to £75. Firms may want to consider offering in consultation feedback a more balanced and standardised customer complaint dispute mechanism process.

      5.   KEY POINTS FOR RETAILERS

      Earlier discussions had raised the prospect that retailers offering third party BNPL would need to consider FCA authorisation as a credit broker (introducer). The Consultation proposes that this should not be necessary.The Government may require merchants to improve their notifications and advertising to ensure consumers are aware that they are using a BNPL product and provider.

      6.   NEXT STEPS

      While the Government considers BNPL agreements as potential source of consumer detriment, the Consultation shows that “there is relatively limited evidence of widespread consumer detriment materialising at this stage”. It suggests that BNPL regulation is “proportionate” but not “so burdensome that it inhibits the product being offered, or reduces consumer choice”.  

      The Consultation suggests that a bespoke approach to the requirements governing how BNPL is offered would be more appropriate than imposing the CCA provisions in their entirety. This would relate to agreement structure and content and also the customer journey, from marketing and customer approval for a facility to management of customer arrears. 

      These changes need ongoing monitoring by businesses. The precise content of regulatory requirements and scope of changes is not yet clear.  

      The Consultation will be followed by proposals and steps for regulation. An FCA consultation on relevant rules would follow although no timetable has been specified.

      To find out more about DLA Piper and the services they provide to the retail industry, click here.

      This article was also published in The Retailer, our quarterly online magazine providing thought-leading insights from BRC experts and Associate Members.