The U.K. government announced on Monday, June 20, plans to tighten rules on the Buy Now, Pay Later (BNPL) sector aimed at protecting users — but new rules aren’t likely to be in place until mid-2023.
The new rules will require BNPL providers to carry out checks on consumers to ensure that they can afford to take out loans, and lenders will also need to be approved by the Financial Conduct Authority (FCA). This announcement was long-awaited by the industry since the government closed a consultation in January about the future of BNPL services in the country.
With the exponential growth of BNPL services during the pandemic, researchers estimated that the U.K. BNPL market was worth GBP 5.7 billion in 2021; regulators grew wary that consumers could be harmed as the sector was largely unregulated. This fear was later exacerbated by different reports that consumers were using BNPL loans to cover essential expenses like utility bills or that consumers were resorting to credit card debt to cover BNPL debt.
“Buy now, pay later can be a helpful way to manage your finances, but we need to ensure that people can embrace new products and services with the appropriate protections in place,” said John Glen, economic secretary to the Treasury.
“By holding buy now, pay later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the U.K.”
BNPL services in the U.K. benefit from an exemption in the law for short-term credit-free credits. The government’s announcement to introduce regulation in this space will not only affect BNPL products, but also other forms of unsecured short-term credit, in an attempt to close this regulatory gap.
The plans will also amend financial promotion rules to ensure advertisements are “fair, clear and not misleading,” and consumers will be able to take complaints to the Financial Ombudsman Service. The proposed regulation is intended to guarantee that consumers and providers make good use of the services rather than imposing any prohibitions — that is why the measures focus on ensuring that consumers understand that they are taking on debt and on ensuring that providers are granting debt to people with ability to afford the product they are purchasing using BNPL.
Stakeholders can submit comments on the proposed measures by August 1, 2022. The government said that it expects to publish a consultation on the draft legislation towards the end of the year, with secondary legislation by the middle of 2023. The FCA is also expected to publish a consultation on the rules for the sector after the government publishes the secondary legislation.
BNPL providers have taken different approaches during this time. For example, Klarna began to voluntarily provide information to U.K. credit agencies since June and it has introduced other measures to increase transparency with consumers.
On Friday, the U.K. government announced another measure that could affect BNPL loans. The government is planning to reform the Consumer Credit Act, a 50-years old rule which regulates credit card purchases and personal loans.
The government didn’t provide information about the specific measures that it may introduce, but it said that it is expected to cut red tape — and most importantly, it will grant powers to the FCA to respond quickly to emerging developments in the consumer credit market, rather than having to amend existing legislation every time. The government also wants to simplify ambiguous technical terms to make clear to consumers what protections they have.
Klarna, the BNPL provider, welcomed the news. “By reforming the act, the Treasury has the opportunity make the regulation of consumer credit more focused on enabling competition and better consumer outcomes, not protecting banks,” said Head of Klarna U.K. Alex Marsh.