With the Treasury planning to tighten the rules for “Buy Now Pay Later” (BNPL) lenders by bringing them into the scope of Financial Conduct Authority (FCA) regulation, it will bring greater scrutiny to lenders and cause them to double check their affordability assessments to ensure they are robust and appropriate. However, it also represents huge opportunity, especially during the cost-of-living crisis.
BNPL provides customers with interest-free credit, usually for up to 12 months, which is regularly offered by retailers to help customers spread the cost of purchases. Although it is interest free, many BNPL lenders charge late fees and lack of regulation of the sector has caused serious concern about consumers building up crippling amounts of debt. From my experience, it’s certainly the case that some don’t understand the potential dangerous implications of entering into multiple agreements.
The BNPL market has more than exploded in recent years having trebled in 2020 alone! Most BNPL lenders rely on an exemption that was originally designed to be used for short-term invoice deferral. This has been widely utilised to provide point of sale credit, most the online consumer goods market, where customers can spread the cost of everything from fashion to sofas.
In spite of the benefits BNPL providers like Klarna and Zilch can bring, it’s been the “wild west” of credit given the previous lack of regulation.
But regulation has been coming for a while, with the former interim CEO of the Financial Conduct Authority (FCA), Christopher Woolard, highlighting the urgent need in 2021. The problems that have come to light with BNPL are especially visible in ‘vulnerable’ customers such as those who, for various reasons, may struggle to manage finances. This has been exacerbated by the cost-of-living crisis. As such, I applaud the Treasury for looking to bring in regulation quickly.
The lack of affordability assessments in the BNPL sector has been widely criticised as a number of lenders are currently only carrying out basic credit checks.
This leads to vulnerable customers potentially taking out multiple agreements at once, and if they reach the limit of the number of agreements with one lender, they can easily switch to another lender, causing a butterfly effect and massively damaging a customer’s wider financial position.
The new proposals will make the entire BNPL journey regulated, from advertising through to arrears collection. Now, consumers will be able to complain to the Financial Ombudsman Service where BNPL lenders have treated them unfairly. Advertising and promotions issued by lenders will be regulated and retailers advertising BNPL will need these adverts to be approved in line with new FCA rules.
Existing regulations are also in the pipeline which will prescribe information that customers must be given before entering into such agreements, with a view to ensuring they have all the information they need.
Overall, the approach to regulation appears to address the FCA’s major concerns with the sector, especially in respect of protecting consumers from building up escalating debt and making them more informed about the impact of loans.
I encourage BNPL lenders to welcome the Treasury’s attempts to make the regime more flexible, and, despite the Treasury introducing greater regulatory friction into lending, the sector should approach regulation with a positive mindset – it’s an opportunity to review and adapt business models to become more efficient and future proof. It’s also an opportunity for lenders to reconnect positively with their customer base. Under the new guidelines, these lenders that have informed customers entering into loans should be able to make efficiency savings in collecting debts, which will lead to greater customer satisfaction and fewer complaints.
One critical distinction is that retailers that provide an interest-free 12-month credit option without the use of a third party BNPL lender will fall outside of regulation. However, plans on implementing anti-avoidance measures are underway so that lenders that operate a “resell” model (where a retailer sells goods to the BNPL lender who automatically resells the goods to consumers) will still be caught out.
It will of course take time to implement, however, regulation is required urgently – as the cost-of living crisis bites, pressure on earnings is likely to lead to an increased demand for credit from some consumers whose budgets are already under pressure.
