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With uncertainty over the future of regulating BNPL products, Payments Review examined the current status, the impact of any legislation and what protection three of the UK’s largest providers have in place.
Rumours were circulating in the press in the summer (July) that the government may shelve plans to regulate buy-now pay-later (BNPL) products, over fears that regulation could push service providers away and lead to less available low-interest credit products.
Regulation for the products has been in development since the Woolard Review was published in January 2021, which found an “urgent need” for regulation in the space to protect consumers.
The suggestion that the regulation could be shelved has surprised a number of people, as development of the rules was well underway with a consultation launched in February 2023, concluding in April.
According to a report from the Centre for Financial Capability, 36% of UK adults have used BNPL, up from 29% in 2021, showing the fast-growing adoption of the product.
For consumer groups, the news has been a blow. “If these reports are true, it is a huge backwards step,” says Katie Watts, head of campaigns at consumer group MoneySavingExpert (MSE).
In order to offer consumers the same protections that other forms of lending do, BNPL needs to be regulated, says Watts. “BNPL is a debt and therefore should play by the same rules as other forms of debt.”
The suggestion in the reports is that BNPL firms have expressed concerns about the burden that regulation would put on their operations if they were brought into the scope of laws such as the Consumer Credit Act.
Other market participants do not think that BNPL regulation will be shelved, but that it may be delayed instead.
“BNPL will be regulated in the UK,” says Luke Seaman, head of public affairs for Klarna UK in response to the rumours. “The arguments in favour of regulation are too strong.”
For Klarna, the largest BNPL provider in the UK, the delay may not be all bad. “If BNPL regulation is delayed in an effort to make sure it’s effective and not just a tick-box exercise, then that’s a good thing,” he adds.
As there are many jurisdictions where BNPL has not taken off so much as in the UK, that means elsewhere, regulators have not yet started looking at the products. This is a concern for the government as BNPL providers have said that if rules are put in place that are too complicated, they will exit the market.
In the UK, BNPL products are not currently regulated. They are exempt from the Consumer Credit Act because they do not charge interest on the payments. Instead, firms based their business models around fees to merchants who use BNPL as a payment option and/or late fees when consumers have missed payments.
Particularly during the cost-of-living crisis, the main concern from a consumer protection perspective is the affordability of the loans.
“One of the concerns is that a consumer may only take out small loans with each BNPL provider, but they may hold multiple BNPL agreements that are collectively unaffordable for them,” says Rachpal Thind, partner at Sidley Austin.
In an unregulated environment, it would not be clear to a provider if they have BNPL loans elsewhere as there is no requirement to either run credit checks or provide data on customers to credit reference agencies.
Added to that, the option which BNPL provides of paying for more expensive items in smaller chunks can incentivise people to spend more than they usually would or buy goods and services that they couldn’t necessarily afford without the BNPL provision.
“BNPL is not in itself a bad product,” says MSE’s Watts. “Used right it can be a useful and cheap way to spread costs.”
The other concern is that consumers often see BNPL alongside other payment options like PayPal or Apple Pay. This can mean people do not think about it as a form of debt, since they do not have to go to the bank and apply for the loan. That can also incentivise people to take on debts who may not usually.
“Regulating BNPL would effectively apply controls to the marketing and promotion of these services, and the information given to customers, making clear that this is not a lifestyle choice, it is a form of debt and there are consequences for not making repayments,” says Watts.
“Regulation would also mean BNPL provides section 75 protection, like with credit cards, if something goes wrong.”
Section 75 is a part of the Consumer Credit Act, which means that credit providers have to refund a customer if they did not receive the goods or services they paid for and cannot get a refund from the original supplier.
Under the proposed rules, Watts explains that regulating BNPL would also force higher standards for complaints too, including giving consumers access to the Financial Ombudsman Service, which can independently adjudicate any unresolved complaints and can enforce its decisions on BNPL providers.
The industry view
While firms are keen for the sector to be regulated, a common theme is apparent – the need for fit-for-purpose and appropriate regulation of the industry.
This is in contrast to the current proposals, which would see BNPL brought under the Consumer Credit Act.
“The consumer lending market was very different when the Consumer Credit Act was adopted in the 1970s,” says Thind. “Market participants have expressed concern that the prescriptive requirements of that act are not practical for online point of sale credit.”
The Consumer Credit Act was also created for a market of much larger loans over much longer tenures and have interest, whereas BNPL loans are much more limited, interest-free and consist of a set number of payments.
“There is a need for bespoke regulation designed for the sector,” says Gary Rohloff, managing director and co-founder at BNPL firm Laybuy.
The other concern is finding a way to effectively apply a credit checking process in what is normally an instant process of clicking the BNPL provider option at checkout.
Such credit checking can be an important part of ensuring consumers can afford to take out these loans even though each BNPL provider do not offer consumers much debt. This is because it can allow firms to see an individual’s whole credit profile as they may have many other small BNPL debts outstanding that add up.
Generally, firms in the industry are supportive of bringing in regulations, so long as they are well fit for the fintech environment.
“Clearpay already has safeguards in place to protect consumers, but we recognise that not every provider has the same approach,” says Rich Bayer, UK country manager at Clearpay. “This is why we support proportionate and appropriate regulation that sets high industry standards across the board.”
Meanwhile, Laybuy were more descriptive about what positive regulation could look like: “Regulation should include, at a minimum, a requirement to credit check consumer, obligations around responsible marketing, requirements on duty of care, and access to an independent dispute resolution service,” says Rohloff.
A number of firms already share data on BNPL product usage with credit reference agencies to ensure these debts are taken into account in credit checks, however this is not standard across the board.
The levels of protection for buyers varies across the industry. Some BNPL firms have pre-empted what could come with regulation and have initiatives which reduce concerns over affordability and the complaints system.
Clearpay, for example, has a spending limit, starting customers on a low amount of up to £450. The company also requires customers to make their first repayment upfront. Customers cannot use a product if they miss a repayment, their account is paused, and they cannot use it again until payments are up to date.
A major concern for consumer protection groups, however, is that all these initiatives are run internally and vary among provider, so there is little recourse for the consumer to an independent body.
In terms of complaints, Klarna has attempted to facilitate this service by appointing an internal ‘complaints adjudicator’, which replicates the support of the Financial Ombudsman Service, by providing a review for any customer unhappy with the resolution of a usual customer services complaint.
However, as this is not independent, it’s not clear how effective this tool can be.
Klarna has also introduced the industry’s first voluntary ‘credit opt-out’, as an option to help people set limits on their spending through BNPL. While firms are creating numerous initiatives to promote consumer protection and not encourage unaffordable debt, the lack of an industry-wide standard in the space is an issue.
How different providers would respond to…
If a customer purchases an item with BNPL and then wants to return it but in the meantime the supplier goes bust.
In this situation, the consumer still retains the right to a return, but the BNPL provider is not liable to cover this.
Payments Review asked BNPL providers how they would handle this kind of legal grey area.
If a supplier closes its operations and doesn’t provide the Clearpay customer the goods/services they’ve paid for through BNPL, Clearpay will refund that customer or cancel the debt.
“Our customers will not be in a position where they are out of pocket or lose their legal rights to return,” says Bayer.
If the administrator [of the insolvent supplier firm] refuses to accept a return then the customer is liable to continue making payments to Laybuy, but the firm would work with the customer and help engage the administrator, according to Rohloff.
“If continuing to make repayments in this situation would cause the customer undue hardship or financial difficulty, we would of course work with them and look at different options available, including pausing payment and developing an alternative payment plan. In severe cases, we would also cancel repayments.” he adds.
Another major area of concern is what happens when things go wrong, where there are more complicated outcomes that those paying with BNPL are unlikely to think about in advance.
If a BNPL provider went into administration while a customer still had outstanding debts, this is unlikely to impact what the consumer has to do very much. However, if a BNPL provider goes insolvent while a consumer has an outstanding complaint lodged with them, regulation would offer better consumer protection.
The regulator wouldn’t wind down a company or allow them to be wound down until all consumer complaints had been addressed.
“With the extension of the Consumer Credit Act to BNPL credit products, consumers would be protected against a breach of contract or misrepresentation by a supplier, because section 75 of the Act would allow a borrower to raise a claim against its BNPL lender for any such breach or misrepresentation,” says Sidley Austin’s Thind.
However, while the space is unregulated, BNPL providers will have different approaches to these greyer areas.
Even outside of the regulated environment, there is one legal protection which consumers can use regarding BNPL products, if the contract is deemed to have unfair terms. However, the rules for this are fairly subjective and would require the consumer to sue the provider in question – meaning it’s unlikely to be a helpful port of call for many BNPL users.
As the industry waits to see whether the rumours that the government has planned to shelve the plans is true, all eyes will be on the consumer protection concerns posed by BNPL products.