In our article last month (available here), we explored how Buy Now Pay Later (BNPL) works, how it is currently regulated in the UK and the impact of impending regulation. The much-anticipated HM Treasury consultation on regulating BNPL has now arrived. The government launched the consultation on 21 October 2021 and has asked for responses by 6 January 2022.
Alongside the rise in popularity of BNPL products, regulators have become increasingly concerned that BNPL is a form of credit which attracts all of the issues faced by other, more standard forms of credit (for example, ensuring that the credit is affordable for borrowers). But, whilst traditional lenders are subject to consumer credit rules imposed by the FCA and the requirements of the Consumer Credit Act 1974 (CCA), many BNPL arrangements are not.
On 2 February 2021, the FCA published the Woolard Review which reported on change and innovation in the unsecured consumer credit sector. The report concluded that customers have a tendency not to view BNPL as a form of credit (or to consider the risks associated with it) and affordability checks are often not carried out. At the same time, as the report highlighted, the value of transactions using BNPL from the main providers more than tripled in 2020. Accordingly, the report recommended that BNPL products should be brought within the scope of the regulatory regime.
Key takeaways from the consultation
Some of the key changes which the government is considering under the consultation are:
In response to the consultation, Innovate Finance (the industry body representing the FinTech community in the UK) published a statement which stressed the need for certainty and clarity on the regulatory approach, to enable credit providers and retailers to develop products and services with confidence. This requires a clear timetable for the development of the regulatory regime which supports continued innovation. As pointed out in the statement, the market will continue to develop in the absence of a new regulatory regime, and this will potentially make the application of new regulation more complex.
The consultation closes on 6 January 2022. Following the consultation, the government will provide a summary of responses and will set out next steps for its work on regulation of BNPL.
BNPL is a great example of the increasing trend of “embedded finance” and how new fintech models can capitalise on demand for products which help consumers manage their finances more easily. Whilst it is important that consumers are protected as these arrangements become more popular, as ever, regulation needs to find a balance between protecting the potential harm to consumers and fostering innovation in financial services, and how these services are consumed or utilised by the consumer. On the whole, with meaningful engagement by HM Treasury with industry on this consultation, the proposals set out lay promising foundations for a sensible and proportionate regulatory approach.
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