Regulation now, not later: What’s next for ‘buy now pay later’ schemes? 

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A consultation on the Financial Conduct Authority’s regulation of the 'buy now pay later' sector closed last week. Research has shown that consumers are not fully informed on how BNPL works. What does this sector need to improve on to better protect consumers? 

The recent consultation by the Treasury sets out policy options to achieve a proportionate approach to regulation. Buy now pay later has grown significantly in popularity since the start of the pandemic, with the value of transactions using BNPL from the main providers tripling in 2020. This value is expected to grow rapidly by 2024 according to the FCA. 

“The growth of the market is phenomenal... Since the consultation started in October, millions of people have taken out new loans they may not fully understand or be able to afford. Citizens Advice said that one in 10 people used buy now pay later over Christmas alone,” said senior personal finance analyst at Hargreaves Lansdown, Sarah Coles. 

Are consumers informed enough? 

A sizeable proportion of people don’t see BNPL as a form of debt, according to new research by consumer rights organisation Which? 

Although this service is a form of credit, it works differently compared to more traditional methods of borrowing such as credit cards, and the research has revealed that there is low engagement with BNPL provider’s terms and conditions.  

"People thought of buy now pay later as budgeting solutions rather than credit. They didn’t read the terms and conditions and were more likely to buy things they didn’t need or couldn’t afford,” said Coles. 

This low engagement leads to confusion and misunderstanding, and due to how little time it takes to sign up to BNPL, it is easy for consumers to miss important information.  

“The Woolard Review warned that people can borrow without understanding what they’re getting into, or indeed appreciating that they’re borrowing at all... One bank told the review that one in 10 of its customers who had these deals were already in arrears,” said Coles.
Since buy now pay later schemes aren’t currently regulated by the FCA, providers don’t have to undertake a credit affordability assessment before allowing consumers to use their products. Although some ‘soft’ checks are commonly run, without the proper credit checks, consumers could be putting themselves at risk.  

Lack of proper credit checks could lead to people borrowing more than they can afford to repay and could negatively affect their credit score if they fail to pay. But without regulation, consumers can't benefit from additional protections and won’t be able to complain to the Financial Ombudsman Service if something goes wrong. 

The consultation’s proposals 

To tackle these issues and attempt to make BNPL a safer experience for consumers as it grows in popularity, the consultation includes a set of proposals to help the success of the scheme whilst also aiming to help consumers. 

Head of buy now pay later service Klarna, Alex Marsh, said that Klarna welcomes the Treasury’s recommendations and until then will still work to deliver high standards of protection. “At Klarna we have not waited for regulation; we already operate to the highest standards,” he said. “The HMT consultation is an important step forward in regulating BNPL, which we have long called for.” 

Marsh also said that stronger protections for BNPL consumers are “badly needed” as old banks enter the space: “It’s important the regulation protects consumers, not banks, and enables continued innovation, competition and alternatives to high-cost credit, within the appropriate guardrails.” 

The proposal includes the suggestion that people would have to complete a credit agreement before borrowing which sets out the terms of the loan. BNPL firms would have to use credit worthiness assessments that look at both the risk that customers can’t afford to repay, and overall affordability. 

It proposes that the way the services are promoted on retailers’ websites should comply with the FCA’s financial promotions regime, which would then be checked by the FCA.  

Other proposals include the fairness of treatment for consumers who miss payments due to financial difficulty, and consumers being able to use the FOS if they encounter any difficulties. Section 75 has also been proposed to apply to BNPL, making providers liable for breach of contract by the retailer and the rules to also be amended to cover credit agreements for less than £50. 

“Regulation of buy now pay later needs to start now – not later,” said Coles. “The FCA has said regulations will kick in this year, but it can’t afford to drag its feet, because while it’s going through this process the sector is mushrooming before our eyes.” 

How will regulation of buy now pay later change the spending and saving habits of consumers? 

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