The Government has announced that the Buy Now Pay Later (BNPL) sector – featuring the likes of Klarna and Clearpay – is soon to be regulated by the Financial Conduct Authority (FCA).

This follows the publication of a major review, highlighting the potential dangers for consumers in a sector that has nearly quadrupled in size during 2020.

This Insight gives a brief overview of BNPL, its “significant potential consumer harm” and next steps for legislation.

What is Buy Now Pay Later?

You may not think that dentists and exciting FinTech startups have much in common, but it turns out that they do…

Dentists sometimes offer their customers the option to pay for the cost of treatment over several instalments, without charging interest. They are able to do this without falling under the FCA’s regulatory scrutiny because of an exemption in law that means these payment plans are not viewed in the same way as traditional credit agreements.

The same is true for firms like Klarna in the BNPL sector. These firms give other businesses, such as H&M and ASOS, the ability to allow their customers to pay later or in instalments, also without charging interest.

BNPL firms typically make their money by charging commission on orders that the merchant receives, with more flexible payment options said to lead to more orders. They can also charge late payment fees for those who don’t pay on time.

Why has the Government announced regulation of BNPL?

Earlier this week, Chris Woolard, former interim CEO of the FCA, published his review into the unsecured credit market. It includes recommendations on a range of issues, such as debt advice, problems with current debt solutions and the need for affordable credit. But it is the call for action on BNPL that has garnered the most attention.

Mr Woolard said there was “an urgent need to regulate all” BNPL products. He noted that while such products provide “a meaningful alternative to payday loans and other forms of credit” they also “represent a significant potential consumer harm.”

The review highlighted several potential harms, including:

  • A lack of understanding of BNPL offers: Consumers don’t view it as a form of credit, so “may not apply the same level of scrutiny to their decision-making as they would for other credit products.”
  • Consumers think they are protected: Many think the service is already regulated and that they can refer complaints to the Financial Ombudsman Service (which they can’t).
  • The potential to create indebtedness: A lack of affordability checks and ability to use multiple different lenders means “it would be relatively easy for a consumer to amass around £1000 of BNPL credit.”

One bank that provided data for the review found that, of their customers who had made a payment to two of the large BNPL providers in November 2020, 10% had exceeded their overdraft limit in that same month.

It could be argued that BNPL debt could get out of hand quite quickly, given that the value of BNPL transactions nearly quadrupled between January and December 2020 to £2.7 billion. However, the review does note that BNPL currently only accounts for around 1% of the overall credit market.

Possible legislation

The call to regulate BNPL has been widely welcomed by campaigners and debt advice charities. Some BNPL businesses have also been supportive of the proposals. Klarna, for example, said it welcomed “robust regulation” to improve transparency, improve eligibility checks and give BNPL consumers the same protections as those given for other credit products.

John Glen, Economic Secretary to the Treasury, said that his officials are exploring policy and legislative options with the FCA and that he intends to “take forward the necessary legislation as a matter of priority.” This might be achieved through secondary legislation to the Regulated Activities Order within the Financial Services and Markets Act – which is the act that presently grants BNPL (and dentists) exemption from FCA regulation.

BNPL has also been raised throughout the Financial Services Bill’s passage through Parliament. An amendment to the Bill by Labour MP Stella Creasy on 13 January called for the Treasury to require the FCA to regulate BNPL. It was voted down as the Government’s position at that time was to wait for the outcome of the Woolard Review before taking “swift and proportionate action.”

The review’s other recommendations, on subjects such as funding debt advice, have also been welcomed by the Government, which said it would examine and respond to them in “due course.”

Further reading

About the author: Jamie Evans of the University of Bristol’s Personal Finance Research Centre is a Parliamentary Academic Fellow working with the House of Commons Library.

Photo by Kaitlyn Baker on Unsplash

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