Implications of government consultation on buy now, pay later sector

Answer

In July, the new Labour government announced plans to regulate the currently unregulated buy now, pay later (BNPL) sector. This has since been followed by the publication of a policy consultation in October, which sets out the government's long-anticipated plans and draft legislation for regulating the BNPL market.  

Attempts to regulate the sector have been ongoing since the publication of the Woolard Review in 2021. The review, published by the Financial Conduct Authority (FCA), identified several issues inherent to unregulated BNPL, including misunderstanding among consumers, an absence of required affordability assessments and inconsistent treatment of customers in financial difficulty.

The previous government pledged to regulate as a “matter of priority” and published its own consultations in October 2021 and February 2023. However, leaders in the market pushed back on the basis that the plans – which would’ve involved rigid application of certain sections of the Consumer Credit Act 1974 (CCA) – would make the product too cumbersome to be of use. Ultimately, no legislation was brought forward before parliament was dissolved earlier this year.

As confirmed by Tulip Siddiq MP, secretary to the treasury, this latest attempt at regulation will provide key protections to consumers of BNPL products while ensuring that the sector is provided with the "certainty it needs to innovate and grow", a vision in line with Labour's plans to “kickstart” economic growth. But what does regulation mean for currently unregulated BNPL providers, and why has it taken so long?

What’s BNPL?

‘BNPL’ is a type of interest-free instalment credit that allows customers to split the cost of a good or service into regular repayments not exceeding a 12-month period. It’s, in effect, a form of short-term financing, similar to a standard loan, but often subject to much less stringent regulation than more traditional counterparts. Payments are made in instalments and generally give rise to no interest or charges provided each is paid on time.

The BNPL market has flourished in recent years. According to Statista, the estimated transaction value of the UK BNPL market is expected to surpass $38 billion in 2024 and is set to rise further still to $60 billion by 2029. Up from 36% in 2023, around half of all adults in the UK are now believed to have used BNPL services at least once in their lives – that's around 26.4 million people.

The growth of the industry has aligned closely to the rising cost of living felt across the country over the past few years. The interest-free, no-charge functionality of unregulated BNPL financing makes for an extremely attractive prospect to individuals without other means to immediately pay for goods and services in full. But this is also a double-edged sword, with those same individuals often being unable to keep up with payments later down the line.

In January, the Citizens Advice Bureau reported that it’d experienced a surge in requests for help in relation to BNPL services, up 76% on the previous year. Two in five of those requests came from individuals in serious financial hardship, meaning those who required food bank referrals or other emergency charitable support.

Price comparison site Finder published similarly concerning statistics. In April, it reported that more than half of all BNPL users in the UK had paid a late fee (that's 10.6 million people), which can seriously affect the credit scores of some of the country's most vulnerable people. Many of those people (29%, according to the Citizens Advice Bureau) then turned to other forms of borrowing, such as traditional loans, to pay off those late fees.

However, unlike businesses that offer regulated credit products, such as credit cards, companies that only provide unregulated BNPL products currently fall outside the scope of regulation, as a result of structuring their products by means of an exemption. This means that legislation and regulation designed to protect consumers in relation to credit products doesn’t apply to unregulated BNPL products.

This has a number of problematic consequences. For one, unregulated BNPL companies can offer certain types of financing to consumers without the need to run affordability checks, which can be crucial to ensuring that individuals in financial difficulty don’t spiral into unmanageable levels of debt. Furthermore, customers of unregulated BNPL products can’t turn to the Financial Ombudsman Service (FOS) should issues arise, a body often essential to resolving disputes between consumers and financial service providers.

Proposed regulation

Renewed efforts to regulate the BNPL sector were welcomed following the government's publication of its 57-page Regulation of Buy-Now, Pay-Later: Consultation of Draft Legislation this October.

The consultation will run until 29 November to reflect the urgency with which the government seeks to impose new legislation. A final bill is expected to pass through parliament in 2025 and, if successful, new regulation is likely to take effect from 2026. But what will this mean for a sector which has so far benefitted from relative legislative freedom?

Currently, only BNPL lenders that also offer regulated credit products are required to be authorised and regulated by the FCA. Under the new legislation, unregulated BNPL providers will need to be authorised and regulated by the FCA. However, it’s worth noting that currently plans will only apply to third-party BNPL lenders and not merchants that offer BNPL agreements on their own products, but the treasury will continue to keep that under review.

The government's latest plans hope to find a suitable middle ground between the needs of BNPL lenders and consumers by addressing the problems inherent to unregulated BNPL lending, while taking consideration of the needs of providers in a market that continues to contribute enormously to economic growth.

In summary, the government proposes to protect consumers by ensuring that they “receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise”. This will be achieved by a number of measures being proposed such as requiring BNPL companies to:

• carry out mandatory affordability checks in order to confirm that customers are able to afford repayments before offering a loan; however, it’s currently unclear whether these measures will fall short of full credit checks, as often required of other financial institutions;
• provide clear, simple and accessible information in advance of credit agreements to ensure that consumers can make informed decisions; and
• Comply with section 75 of the CCA, enabling customers to claim refunds directly from lenders and have access to the FOS to make complaints.

In a direct response to previous industry concerns, the government is also intending to disapply the strict CCA information disclosure rules, which means it’ll be up to the FCA to develop bespoke rules for the sector.

Responses

The renewed effort by the new government to regulate the BNPL sector as a priority has been welcomed by many, including consumer bodies and the FCA, and BNPL providers themselves. 

Klarna Chief Executive Sebastian Siemiatkowski has shown enthusiasm for the consultation, representing what he sees as "proportionate rules" that "protect consumers while fostering growth". Clearpay's International Head of Public Policy Michael Saadat also welcomed the announcement, noting perceived improvements on the previous attempts to regulate; "HM Treasury has listened to industry feedback", and in doing so "evolved the previous framework to ensure a more proportionate approach to regulation."

However, praise hasn’t been ubiquitous. While recognising the plans as a step in the right direction, long-time campaigners for BNPL regulation, such as Martin Lewis and Labour's Stella Creasy MP, have expressed their concerns surrounding the long wait until 2026, when new FCA rules are intended to take effect. As reported in the Guardian, Creasy pleaded that "regulation cannot come a moment too soon as without it my constituents are still better protected from being ripped off by paying using a credit card or even a payday loan".

Conclusion

The BNPL sector continues to grow at an extraordinary pace and shows no signs of slowing down. While regulation is absolutely necessary to ensure that consumers of BNPL products are better protected, the government and the FCA must be careful to strike the right balance.

Developments in this area should be watched with a careful eye.   

Charlie Osbourne is a trainee solicitor at RPC.