In February 2021, the Government announced its intention to regulate Buy-Now-Pay-Later (BNPL) services. It has now published a public consultation, calling for stakeholder views on the scope and form that the proposed BNPL regulation should take.
The consultation opened on 18 October and will run for 12 weeks, until 6 January 2022. It appears to be the first step in providing greater protection for consumers from the increasingly popular yet still unregulated applied BNPL payment services.
BNPL services offer consumers the option of splitting the cost of a purchase (goods or services) to a later date, in equal amounts at regular intervals. This can be done in weekly, fortnightly or monthly instalments or by a system of "try before you buy", where payment is only taken after a set amount of time, if the consumer keeps the item. No interest is charged.
There has been a rapid growth in the popularity of BNPL services in recent years, particularly for the purchase of lower-value consumer goods such as fashion items. Whilst BNPL services can be accessed both in-store and online, there has been a particularly marked increase in online usage driven to a certain extent by Gen-Z and Millennials who are more exposed to the high level of promotion of BNPL through social media. This trend has accelerated during the COVID-19 pandemic, as BNPL providers appeared to capitalise on the newfound reliance on online shopping. In 2020, 11% of consumers (around 5 million individuals) said they had used a BNPL service since the start of the COVID-19 pandemic, with the value of transactions using BNPL from the main providers more than tripling.
Moving to protect
At present, the vast majority of BNPL agreements are unregulated, which has the potential to lead to consumer detriment, high levels of debt and inconsistency of treatment of customers in financial difficulties. As we have highlighted in previous articles, the Government has therefore announced that it intends to bring BNPL services under the regulation of the Financial Conduct Authority (FCA).
The recently-launched consultation provides a broad overview of the current state of the unregulated credit services sector (including BNPL), the main concerns and considerations of the Government, and some proposed regulatory solutions. The consultation seeks stakeholder input on: (1) the scope of any new regulation i.e. the type of agreements it should apply to; and (2) the possible regulatory controls that will newly fall into the scope of regulation.
The consultation aims to find a balance between providing regulatory protection (and recourse) for consumers and not stifling future development in a rapidly evolving market, particularly for SMEs. It recognises that interest-free BNPL services are inherently lower risk and flexible, compared to other types of credit, which means that any regulatory controls need to be proportionate.
To identify suitable controls, the Government seeks to understand better the BNPL market and how the potential for consumer detriment (high levels of debt and inconsistency of treatment of customers in financial difficulties) can be managed. Chapter 2 of the consultation is targeted at obtaining views on these aspects, including questions such as: which specific elements of the BNPL business model pose the greatest risks for consumers, is there is widespread consumer detriment.
Chapter 3 proposes a variety of potential regulatory controls which the Government considers may be proportionate to the governance of the BNPL and upon which it seeks stakeholder input. The potential controls and questions posed include: whether BNPL providers should be required to obtain FCA authorisation before they can offer such services, whether there needs to be tighter controls around the advertising and/or presentation of BNPL offers (which often focus on the aspirational side of a purchase rather than the financial element) and if there should be a blanket restriction for low-value transactions i.e. those under £50.
Who should respond, how and by when?
Responses are sought from all stakeholders in the BNPL ecosystem including consumer groups, BNPL lenders, short-term interest-free credit lenders and businesses, such as retailers that offer BNPL and short-term interest-free credit.
The Consultation closes at 11:59pm on 6 January 2022, following which the Government will review the responses and sets out its proposals for regulation of BNPL.
Should you like to discuss the consultation or require assistance in preparing a response, please get in touch.