With HM Treasury launching its much-anticipated consultation on regulating buy-now-pay-later (“BNPL”), it is an opportune moment to take stock of where we are, how we got here, and what to expect from the new BNPL regime.
The rise of BNPL
Over the last 18 months BNPL has seen a meteoric rise across not just in the UK, but across all major credit markets. Companies such as Klarna have now become household names and had valuations to match.
Take up has been driven by a number of factors but it’s clear that both the pandemic and the exponential growth in online shopping have pushed the use of BNPL to levels few expected in such a short period of time. As both mainstream lenders and new providers join the rush to provide BNPL, coupled with embedded finance permeating new markets (such as in the travel and fashion sectors), it’s hard to see anything other than the rise of BNPL continue at the same speed.
It’s no surprise therefore why BNPL is a such a hot topic for fintechs and regulators alike.
What is BNPL?
At its heart BNPL is a relatively simple concept. BNPL allow consumers to delay payment for a purchase until a later date. The BNPL lender will instead step in and pay the retailer, and the customer agrees to pay back the BNPL lender over a period of time (typically between 30 days and 2 months after the point of purchase). The repayment will be interest and fee-free as long as customers make their repayments on time. The BNPL lender instead makes its money by taking a cut from anything they help a retailer to sell.
Why the concern?
BNPL loan agreements will generally fall outside of regulation. In practice, this means the consumer protections in place for those using BNPL, such as the requirement to run affordability checks, are limited when compared to standard loan and credit products.
Faced with huge growth in the use of BNPL from younger users, and much media hype around its potential negative impacts, there has been strong political pressure to bring BNPL within the regulatory framework.
This culminated in the Woolard Review setting out its recommendation in February of this year that the FCA and Treasury work together to ensure that all BNPL products are brought within the regulatory perimeter “as a matter of urgency”.
What will regulation look like?
Last week the Government finally launched its consultation setting out what we can expect from the regulatory framework for BNPL.
HMT’s view is that that the risk around BNPL products is “inherently lower than an interest-bearing credit product”. As a result, they suggest the full weight of the Consumer Credit Act (CCA) regime would be disproportionate for BNPL and have proposed what many will hope should be a more proportionate set of controls.
The key takeaways from the consultation are:
What’s next and when?
The Treasury is asking for views on all the matters discussed above as well as a number of other issues around BNPL. Those interested will have until 6th January 2022 to submit their responses. The FCA then plans to consult on new rules in 2022 and will be developing its approach to the authorisation gateway and supervision.
You can register online or follow us on Twitter or LinkedIn to receive our latest news, events and publications.