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Sooner Rather Than Later: UK Government Proposes New Regulations for Buy Now, Pay Later Services

In a bid to better protect consumers using Buy Now, Pay Later (“BNPL”) services, the UK government has released a detailed consultation document with proposed regulations to increase transparency and ensure responsible lending for firms offering BNPL services.

BNPL services have become an increasingly popular financing option, allowing consumers to defer or split payments for goods and services without immediate interest charges, providing a flexible alternative compared to traditional lines of credit such as a credit card or an overdraft.

However, the relative ease of access to BNPL services has generated rapid growth and increased usage in this sector, raising concerns about the potential risks of debt accumulation and insufficient consumer protection.

With the possibility of increased legislation in this area, it is important for BNPL services to act now and get ahead of the curve. Incorporating best practices sooner rather than later will put firms in a stronger position, ensure a smooth transition and limit risk.

Why the Need for Regulation of BNPL Services?

BNPL services are now more visible then ever at checkout, encouraging consumers universally in store or online to purchase products and pay later in instalments without interest if they meet specific payment timelines. Although this may benefit some consumers who are looking for flexible spending options, it may not always be the best option for everyone. BNPL products have often escaped the scrutiny of traditional credit regulation via the Consumer Credit Act (“CCA”),¹ partly due to their structure and lack of upfront interest.

This means that consumers can access BNPL services without the need to undertake affordability checks, raising concerns around unmanageable debt levels and a lack of consumer awareness about financial risks, fees and terms associated with these services. BNPL consumers may not always be fully aware of the risks of missing payments or how additional fees could affect their ability to obtain credit in the future or afford deferred repayments.

This has led to calls for stronger regulations to safeguard BNPL users who may potentially be considered as vulnerable. The consultation aims to strike a balance between protecting consumers whilst trying not to stifle innovation with over-regulation.

Key Proposals

The consultation discusses several proposals aimed at creating a regulatory framework tailored to the unique aspects of BNPL. The proposal for the new regulatory framework looks to merge principles from existing regulatory frameworks such as the CCA whilst reinforcing outcomes-based regulation such as Consumer Duty and specifically tailoring this for BNPL services.

Clear Disclosures and Consumer Awareness: The consultation suggests BNPL providers will be required to improve how they communicate the terms and conditions of their services, ensuring that users are well informed about the total cost, payment schedules, potential fees and late-payment consequences at all stages of the transactions. The new consumer information disclosure rules will be embedded in the Financial Conduct Authority (“FCA”) Handbook rather than follow the provisions within the CCA. This is to ensure that communication expectations of BNPL firms are aligned with the consumer understanding pillar. BNPL firms will be expected to have clear communication strategies and undertake outcomes monitoring to ensure that they understand the impact of all customer communications and adapt accordingly.
Mandatory Creditworthiness Checks: BNPL providers will be required to perform robust creditworthiness assessments for consumers before approving transactions. This requirement aims to prevent consumers from accumulating debt they cannot reasonably afford.
Defining BNPL as Credit Agreements: The consultation document discusses reclassifying certain BNPL products as credit agreements, including transactions of less than £50, which would formally bring into scope a larger range of transactions into the existing regulatory structure for consumer credit, meaning a consistent level of protection for consumers regardless of the transaction size.
Authorisations: As BNPL agreements would be classified as credit agreements, this would mean that BNPL firms would now be required to be authorised by the FCA. The FCA intends to set up a temporary permissions regime which will allow unauthorised firms to continue to operate their BNPL lending until their application for full authorisation is processed; these firms would be subjected to other FCA requirements, such as adhering to Consumer Duty.
Enhanced Consumer Redress Mechanisms: To better support consumers in disputes, the consultation proposes increased access to redress, including access to the Financial Ombudsman Service, as these firms will become regulated by the FCA. This increased support would make it easier for consumers to report grievances and seek assistance if they encounter unfair practices or experience payment-related issues.
Credit Reporting: Information on BNPL agreements is proposed to be shared with credit reference agencies with the aim of maintaining an adequate level of coverage and consistency of information in consumers’ credit files.

Navigating the New Regulations

To ensure a smooth transition, BNPL providers should start planning now across key areas such as FCA authorisation, consumer protection, data reporting and risk assessment. There are some essential actions firms may need to take to align with the new regulatory standards, including:

Prepare for Authorisation: For firms needing authorisation, the process can be rigorous, requiring detailed documentation of governance, risk management and customer protection practices. Firms will be required to review existing framework documentation to ensure that these documented processes are fit for purposes before and during the authorisation process.
Clear Disclosures and Customer Communication: Firms should plan for post-contractual communications per FCA guidelines, particularly for consumers facing difficulties, using timely and relevant information and steering away from rigid notices.
Implement Monitoring Systems: Firms involving third-parties to distribute or promote their services will be required to ensure that they have sufficient oversight to make sure they too adhere to relevant regulatory requirements. Regular audits, compliance training and a reporting system for potential breaches are essential to ensure that firms are meeting the regulatory requirements on an ongoing basis.
Enhance Support Channels: Firms will need to align customer support with regulatory standards, especially for vulnerable consumers needing assistance with payments and debt.
Develop a Fair Value Framework: Firms will need to assess whether their BNPL products offer fair value by weighing costs, benefits and limitations rather than solely relying on competitor benchmarking.
Implement Monitoring Systems: Firms will be required to track how customers interact with their BNPL products after they enter into an agreement so as to identify misunderstandings and address difficulties in managing payments.
Focus on Good Consumer Outcomes: Develop policies that prioritise fair treatment and positive outcomes for consumers in line with Consumer Duty. Firms should make sure they regularly evaluate BNPL product alignment with these outcomes, especially as market conditions or consumer behaviours change.
Board-Level Oversight: Boards should incorporate how Consumer Duty outcomes are being met in their board packs and with regular reviews of consumer outcomes integrated into their governance structures.
Integrate Credit Reporting Systems: Firms will need to set up systems capable of reporting BNPL agreements to credit reference agencies accurately and in a timely manner.
Mandatory Creditworthiness Checks: Providers will have to create or update affordability tools based on the FCA’s upcoming guidance. They must evaluate each customer’s ability to repay and have demonstrable evidence of that around each evaluation.

Looking Ahead — Impact for Consumers and BNPL Providers

The potential results of this consultation could significantly change the BNPL industry by introducing regulations and processes that could alter how these services are offered, how consumers view these types of transactions and, crucially, how often BNPL services are used and how much reliance consumers place on them when it comes to making a purchase. This new regulatory regime could fundamentally sharpen customers’ perceptions of BNPL products — from a simple payment option to an actual credit offering.

BNPL providers should anticipate the results of the consultation and start to think about how they need to uplift their operational and compliance infrastructures to proactively deal with the additional regulatory tasks. They should be mindful of previous instances of increased regulatory scrutiny on certain types of firms, such as contract for difference firms, payday lenders and claims management companies, and start to get ahead of the curve. Preparing sooner rather than later means that when the time comes, firms will be well equipped to navigate this new terrain and continue to maintain and evolve their existing business propositions from a strong and stable foundation.

Industry and Public Input Sought

The consultation is actively seeking input from various stakeholders, including BNPL providers, consumer advocacy groups and the public, by 29 November 2024. The consultation period allows interested parties to weigh in on these proposals; their insights will be vital in crafting effective legislation.

Footnotes:

1: The Consumer Credit Act is currently in the process of being reformed.