The UK government has announced its consultation for the regulation of buy now pay later (BNPL). This decision comes after the publication of the Woolard Review - a review of change and innovation in the unsecured credit market earlier this year, which highlighted some of the potential consumer risks of BNPL.

The consultation notes that there has been an increase in the number of consumers using BNPL options, and the Woolard Review points out this is in part because the pandemic has driven a greater demand for different credit options. The Woolard Review further emphasizes that younger people may be more likely to turn towards this kind of credit

Cornerstone advisors report that in the US people aged 21-25 using BNPL has grown from 6% in 2019 to 36% in 2021. Similarly, for people aged 26-40 this has more than doubled from 17% to 41% in the same period. The UK government's concerns over this form of credit is in part driven by the fact that over the past two years 43% of BNPL users made late payments. The majority of those making late payments noted that this was because they lost track of when the bills were due.

The fintech response to this BNPL announcement appears to be overwhelmingly positive, citing the self-regulation that has already taken place and the need for customer protection. Additionally, fintechs are welcoming their ability to contribute to this future regulation. To find out more, Finextra takes a deep dive into what the fintech industry is saying on this matter.

The Woolard Review

The decision to have this consultation and resulting regulation comes after the Woolard Review, which was published in February 2021 by the Financial Conduct Authority (FCA). This review detailed the “urgent” need to regulate BNPL, with Christopher Woolard CBE chair, Review of Change and Innovation in the Unsecured Credit Market commenting: “While the emergence of unregulated BNPL products has provided a meaningful alternative to payday loans and other forms of credit, BNPL also represents a significant potential consumer harm.”

Currently BNPL receives a A60F(2) exemption, which allows for agreements that are for a shorter period than the majority of credit products. This exemption notes that in addition to their interest-free nature, their shorter period makes them inherently lower risk than the majority of other regulated credit agreements.

However, within the consultation, the HM Treasury notes with the rise in the popularity of BNPL the use of this exemption, commenting that, “Based on current evidence, the UK government's view is that the nature of BNPL agreements is likely to present greater risk of consumer detriment than other agreements that fall within the A60F(2) exemption.”

Gary Rohloff, managing director and co-founder of Laybuy said: “We welcome the publication this morning of the Buy Now Pay Later (BNPL) consultation by the Government and we will be responding to in due course. Following the Woolard Review earlier this year, it is positive to see that the Government continues to recognise that BNPL is a low-risk payment option and is bringing more choice and competition into the payments market for both consumers and businesses. I am also pleased to see the Government’s distinction between BNPL and other short-term credit products available on the market that do charge interest, often at high APRs, and are increasingly being placed or marketed alongside interest-free BNPL products.”

HM Treasury gives four main objectives for their gathering of evidence:

1. BNPL activities should be subject to an intervention which is proportionate to the level of risk that they present and is not so burdensome that it inhibits the product being offered or reduces consumer choice;
2. Consumers should be adequately and fairly protected from detriment, and can access dispute resolution regarding the conduct of lenders;
3. Regulation for BNPL should not adversely impact competition and innovation across the wider consumer credit and payments markets;
4. Any burden on merchants offering BNPL as a payment option would be proportionate and manageable and should not disadvantage Small and Medium Enterprises (SMEs) over larger merchants.

Protecting the customer

Fintech commentors emphasised their interest in regulation to help protect customers. Innovate Finance states that it “welcomes the UK Government consultation on regulation of interest-free, ‘buy now, pay later’ credit, also known as ‘deferred payment credit’. As the industry body representing the fintech community in the UK, we strongly support a regulatory framework that protects consumers, builds confidence, and facilitates a dynamic and growing market. We believe this can best be achieved through an approach that enables technology solutions and innovation to deliver good outcomes for consumers.”

Innovate Finance continued to point out that BNPL agreements are “a helpful way for many consumers to manage their personal finance and their interest free nature means there is no ‘poverty premium’. These products can help people manage cashflow and pay for unexpected or ‘lumpy’ expenditure. Bringing these services into the regulatory framework should provide consumer protection and confidence whilst supporting a healthy and growing market that maintains the benefits of buy-now, pay-later products.”

HM Treasury comments on the importance of the benefits that BNPL provides, stating: “The government’s wishes to ensure that any regulatory intervention would be proportionate and would balance the potential risks of the product against the benefits that it provides.”

Jason O’Shaughnessy, head of international business at Envestnet Yodlee, shared similar sentiments about customer protection: “Responsible lending needs to be at the heart of all buy now pay later products. Affordability assessments should be built into any purchase that consumers make at check-out to determine if someone can afford to take on credit. To enable people to manage their financial health, it would act as a safety buffer against people with debt issues from taking on credit they can’t afford and stopping them from falling into unnecessary debt. BNPL providers are able to take advantage of open banking connections to provide them with real-time information from banks and lenders. This is another real-world example of using open banking as solution to lending responsibly.”

A statement from Clearpay notes that their “view has always been that consumers will be best served by products that have been designed with strong consumer safeguards, including pausing accounts at the first sign of non-repayment to ensure consumers can never revolve in debt. This cannot be said of traditional credit products with high interest rates.”

The Woolard Review points out that one of the main ways in which customers need to be protected when it comes to BNPL products is because of a general confusion or lack of understanding of what the product is. The review states: “Consumer awareness and understanding of these products varies widely. Consumers aren’t sure whether either product is credit. Some view them as a financial service and therefore think they come with the rights and protections of a regulated product.”

Gary Rohloff, managing director and co-founder of Laybuy, supports this perspective from the government, commenting that their “research shows that consumers think BNPL is a credit product and overwhelmingly believe that providers should be conducting effective creditworthiness checks. We think this is an important point and is why we are the only provider to conduct hard credit checks. I would be very suspicious of any BNPL or credit provider who believed this wasn’t in the interest of their customers and their own business. BNPL is becomingly increasingly popular and I think it is only right we seek the highest standards across the industry.”

Proportionate regulation

It is clear from the statements made by fintechs that they are pleased with HM Treasury’s emphasis on not overregulating the BNPL market, but instead using “proportionate regulation”.

Harry Eddis, partner and co-head of fintech at Linklaters, commented: “The Treasury is taking an interesting position, one that is slightly against what appears to be the prevailing wind. While it agrees with the FCA that consumers should be protected, it does not want to regulate BNPL out of existence, evidencing perhaps a continuing desire for regulatory flexibility on business models.”

Clearpay stated that they are “encouraged that the Government is focused on the need for proportionate regulation that puts consumer protections at the heart, but does not stifle fintech innovation or consumer choice. In particular, we are pleased the consultation paper acknowledges that ‘there is relatively limited evidence of widespread consumer detriment materialising at this stage’.”

Some in the industry were encouraged by the consultation paper’s ability to differentiate between BNPL and other short-term credit products in this context. Rohloff said: “it is positive to see that the Government continues to recognise that BNPL is a low-risk payment option and is bringing more choice and competition into the payments market for both consumers and businesses. I am also pleased to see the Government’s distinction between BNPL and other short-term credit products available on the market that do charge interest, often at high APRs, and are increasingly being placed or marketed alongside interest-free BNPL products.”

Anthony Drury, managing director of Zip said: “As with any new, innovative financial product, it’s important that customers are protected by regulation, ensuring that there is clarity and consistency across the industry. This will give consumers confidence, provide retailers the opportunity to grow, and allow businesses like ours to invest and innovate in the UK. We welcome the opportunity to contribute to the development of the new regulatory framework, and we look forward to working with HM Treasury.”

The future of BNPL in the UK

The government’s consultation opened on the 18th of October 2021, and will close at 11:59pm on 6 January 2022, leaving 12 weeks for views to be submitted. HM Treasury welcomes responses from all stakeholders, including consumer groups, BNPL lenders, short-term interest-free credit lenders, other lenders, and businesses, such as retailers, which offer BNPL and short-term interest-free credit.

Innovate Finance stated that “eight months on from the Woolard Review, it seems unlikely that a new regulatory regime will be introduced before 2023. Credit providers and retailers need certainty and clarity on the regulatory approach, to enable them to develop products and services with confidence.”

Innovate Finance also announced that it has “set up a policy group of Innovate Finance members to help us develop our input. This group brings together ‘Buy-now, pay-later’ providers and other FinTechs which specialise in credit decisioning and ratings, Open Banking / Open Finance, financial inclusion, payments systems and RegTech.”

Eddis pointed out some concerns in the industry of what this step towards regulation might mean, stating: “Several important pieces are still up in the air however. For example, it is not clear how the line will be drawn around BNPL to bring it within the scope of regulation without accidentally bringing in other forms of short-term credit which the Treasury says should remain unregulated. Some careful drafting of legislation will be needed.”

Eddis continued to add that, “at the same time, a lot of important detail has been left for the FCA to decide. These include how rules on creditworthiness assessments and pre-contractual information should apply to BNPL agreements. In the meantime, BNPL providers will be glad that the Treasury isn’t suggesting applying the full suite of consumer credit obligations to them and instead a more tailored BNPL-specific regime is likely to emerge.”

Drury concluded: “If implemented effectively, it’s likely we’ll see more people using Buy Now Pay Later as a convenient part of their personal finance toolkit. In the meantime, we’ve not waited for regulation and have already put in place measures aimed at protecting and supporting customers, based on our experience of operating in other countries.”

Innovate Finance added a note of support for the future regulation this will be bring: “We have to get the details right, but in principle this consultation provides the basis for developing a regulatory approach that protects consumers and supports continued innovation.”