Buy-now-pay-later is becoming regulated which will affect retailers and all lending business needs to plan for wider rule updates.

The FCA, which regulates UK financial services, has announced plans to overhaul UK consumer credit regulation. Shifts to digital channels underpin these changes.

Buy-now-pay-later (BNPL), will be regulated, where it largely isn’t at the moment, impacting retailers.

Those already offering credit must also prepare for other changes the FCA is planning, whether the credit is an in-house or third party product.

The regulator emphasises the growth of digital lending and how to ensure good customer outcomes. It is also focussing on how customers are treated when they get behind with their repayments.

Change and innovation under review

The FCA has published a report on the findings of its review on change and innovation in the unsecured credit market. This focuses on:

• rapid growth in BNPL as an unregulated credit channel;
• consumer protection and potential harm, particularly in digital channels;
• challenges resulting from the COVID-19 pandemic, especially affordability of credit and lending decisions.

Regulatory change is planned to address these concerns and reassure customers. The FCA intends to allow regulation to adapt more to changing customer habits, where some rules are challenging to implement through digital platforms.

Buy-now-pay-later: Authorisation and compliance implications

BNPL is largely unregulated in the UK. This means that many BNPL providers haven’t needed to be FCA authorised or to follow consumer credit conduct rules. In these cases, retail partners have not needed authorisation or to follow these rules to offer BNPL.

This is going to change for products with all of these features:

• credit is repayable within 12 months;
• there’s a maximum of 12 repayments; and
• no interest or other charges apply if customers repay on time.

BNPL providers will need to become FCA authorised if they aren’t already. This is a lengthy process and regulation will govern customer interactions and business processes.

It is likely that retailers offering BNPL – although it is from a third party – will also need to be licensed. “Introducing” regulated credit requires an FCA authorisation. Retailers would have to comply with conduct rules as “credit brokers”. Alternatively, it may be possible to operate under the umbrella of a BNPL’s own authorisation as an “appointed representative”. Risk frameworks would need implementing to do this.

Buy-now-pay-later: planning

Identifying the implications of these changes and planning for transition is important. Steps include:

• checking the impact of these proposals e.g. will a BNPL partner need to become authorised, and what this means for your own business;
• identifying authorisation and conduct implications, and how these affect the customer journey and processes behind-the-scenes, timings for getting licensed and making systems changes;
• monitoring the regulatory proposals as more detail is published.

All regulated lending: lifecycle changes for business

The FCA is planning a shift in its regulatory stance for credit activity, including business it already regulates.

Lenders operating digitally have found aspects of the conduct rules challenging as they do not always suit digital channels and communication. This was raised in feedback to the FCA and has informed its approach, although it is also wary of digital exclusion. Monitor FCA plans to shift to “outcomes based regulation” in terms of changes to regulation and internal compliance processes.

For those carrying out lending business, or credit broking, be aware of these proposals:

• Digitisation of customer credit journeys: The report emphasises the importance of informed decision-making by consumers. It recommends that the FCA puts in place guidance on digital design for consumer credit which focuses on good consumer outcomes and revises disclosure requirements to become more appropriate for the digital age. The FCA recognises that frictionless online journeys can benefit some customers, but they may inadvertently exclude or create problems for certain types of consumer, including the vulnerable.
• Forbearance: The report acknowledges that affordability assessments and effective forbearance can help to reduce harm where consumers have difficulties making repayments. The report recommends that the FCA identifies how to improve the consistent application of forbearance, and how this is accurately reflected in credit information used for lending decisions.
• Outcomes-focused reform of consumer credit regulation: In an area with a legacy and patchwork regulatory landscape, proposals focus on achieving a “healthy credit market”. A priority is to reform the legacy Consumer Credit Act 1974 and move to more outcomes-focussed regulation. This needs careful monitoring to check its implications for regulated credit business practices. 
• Relending: The FCA is being asked to look at repeat lending and persistent debt. This includes exploring whether borrowers with repeat fixed-terms loans need more protection.
• Evolution away from EU rules: Recom-mendations that the FCA look at whether rules can be adapted post-Brexit are noteworthy. This might include a review of the effectiveness of disclosures such as the Annual Percentage Rate (APR) and the potential value in alternatives such as pound and pence credit cost disclosures.

Monitor and plan

Those offering or involved in consumer credit should monitor how these changes develop and may affect processes and compliance. Credit decisions, customer lifecycle and forbearance are all likely to need adapting. Interactions between the shopping and credit experiences will be key.

Next steps

The FCA and HMT will produce proposals for regulatory change. Formal public consultation will be part of the impact assessment before the changes take place. The FCA’s July business plan will contain more detail.

More information about these changes and how to prepare are available here.