Buy now pay later – what’s happening?

There was a ripple of noise at the beginning of the year when the Government published its consultation paper on the draft legislation required to bring some buy now pay later products into the regulatory fold. This was the latest step in a long journey to address the potential harms identified in the Woolard Review into the unsecured credit market, however since the consultation paper was published in February 2023 not very much seems to have happened.

The original plan was for the Government to lay down legislation when Parliamentary time allowed with the stated intention that this would happen during 2023. This would then be supported by an FCA consultation on what the regulatory regime would look like for those firms who would be within scope. We also see that in the FCA’s most recent Regulatory Initiatives Grid they do still include BNPL as an activity for 2024 provided Parliamentary time allows.

In July however it was reported by Sky News that HMT had been advised that a number of the biggest providers in the UK could quit if they were subject to disproportionate regulation. More recently, in response to Labour’s Shadow City Minister Tulip Siddiq’s call to bring in regulation of BNPL more quickly, a Treasury Spokesperson said

“When used appropriately, buy now, pay later can be a useful, interest-free way for consumers to manage their finances. We must ensure that regulation of these products is proportionate to ensure borrowers are protected without unduly restricting access. We will publish a response to our recent consultation once it is finalised.”

This all sounds to us like they are kicking regulation into the long grass, certainly in the short term, so it looks like there has been some effective lobbying going on from key industry players.

What do we know about BNPL and how it is used?

Like all forms of credit, BNPL can be a really helpful tool for managing personal finances. It’s interest free and provided it is paid off within the specified time period, it can be a useful way of managing a budget. The levels of BNPL credit are also still relatively small compared to say credit card lending, which can have an interest rate attached. In the FCA’s Financial Lives Research Paper published in October 2023 looking at BNPL credit, they found that the average debt for someone who used BNPL in the last year and who has an outstanding balance was approximately £236. This was substantially lower than typical credit card or store card debt which had an average balance of approximately £3,537.

Other interesting points from this research paper pointing to the positive use of BNPL include that in 2022 only a small proportion of users (14%) used this type of credit frequently i.e. 10 time or more. 81% of users said they were aware of fees being charged by their providers and 46% of users said they choose BNPL because it is interest free.

On the flip side however, there are some worrying facts, particularly in relation to those who are vulnerable. The research found that whilst those on lower incomes owed less on BNPL, they owned considerably more as a proportion of their income. In addition, the research found that adults with characteristics of vulnerability were more likely to have used BNPL credit in the last 12 months and were also more likely to have used it frequently.

In the run up to Christmas we have also seen quite a few press releases from debt charities and commentators such as Martin Lewis who are concerned about the use of BNPL credit. Citizens Advice published their own research at the end of November and they found that more than one in four UK adults (around 15.1 million people) said they were likely to use BNPL to help with festive spending. This rises to 56% of parents who have primary aged school children. Citizens Advice also found that those who are unable to cover their essential costs such as groceries and bills, are more likely to have been a regular user of BNPL in the last 12 months and that 11% of users had used the credit to pay for groceries. On the back of this Dame Clare Moriarty, Chief Executive of Citizens Advice said:

"The number of people turning to Buy Now Pay Later, and falling into debt as a result, underlines the urgent need for regulation. With so many households already on the financial ropes, BNPL borrowing for extra Christmas costs risks delivering the knockout blow.

This should set off alarm bells for the government, whose dithering on regulation of the sector has gone on for too long. As the use of this form of credit soars, the impact of its lack of regulation becomes impossible to ignore.

Consumers are being failed and as a result could see a 2024 plagued with unmanageable debt, poor credit, and bailiffs knocking at their door. The government must act on its almost three-year-old pledge and bring the BNPL market into line urgently."

This is a familiar story in financial services, inherently BNPL is not a bad product when sold and used responsibly. However the most vulnerable in Society need protection and help which is exactly what regulation and the Consumer Duty is designed to do. As we have said above, it’s not clear that this is a priority in terms of the Parliamentary timetable so what can the regulator do in the meantime?

The FCA is still interested in BNPL

The regulator is clearly still keen to understand how BNPL products are used and whether any potential harms arise, hence the publication of the research paper in October. We also saw the FCA flex its muscles in another way in October when it used its powers under the Consumer Rights Act 2015 to force PayPal and QVC to make changes to the terms and conditions for their customers.

Consumer Rights Act 2015

It isn’t used very often, but the FCA does have other consumer protection powers outside of FSMA which it can use where poor practice is found. Under the Consumer Rights Act 2015, the FCA has powers to challenge unfair terms in financial services consumer contracts and can ask a firm to amend or remove an unfair contract term.

In this particular case, the regulator identified concerns with the way contract terms were drafted for PayPal and QVC customers. These related to the explanations for the use of continuous payment authorities in both cases, and additionally in relation to PayPal, to the way terms were applied to the cancellation of online purchases during the 14-day cooling off period. As a result, both firms voluntarily made changes to their terms and conditions to make them easier to understand and to ensure they were clearer and fairer.

And don’t forget the Advertising Standards Authority which regulates advertising of BNPL. Amongst other things their rules require that marketing communications are prepared with a sense of responsibility to consumers and to society. They continue to review BNPL advertising to ensure it meets the required standards.

How Avyse can help

We are a firm of specialist purpose led consultants. Whilst we are focused on the regulated world, we take a keen interest in wider developments and can help firms transition to regulation once that point comes. We have a vastly experienced team who have been through this process before with the shift of consumer credit from the OFT to the FCA and who understand the current demands and expectations placed on lending firms. We think BNPL regulation will come along at some point and it is never too early to start planning for that process. Whether you are currently regulated or not, get in contact with us for a chat about what that might look like for your firm.