FCA Buy Now Pay Later regulation to be introduced “as a matter of urgency”
This week an urgent announcement was made that an FCA buy now pay later regulation is to be introduced as soon as possible for companies such as Klarna, Clearpay and LayBuy, due to concerns that their rise in popularity will expose financial vulnerabilities and create high levels of debt.
This buy now pay later regulation will include conducting full affordability checks before lending and ensuring fair treatment to those struggling to repay. Consumers will be given more balanced information about buy now pay later (BNPL) products that appropriately reflects the risks as well as the benefits. They will also be able to escalate complaints to financial watchdogs.
The announcement came after a review of change and innovation in the unregulated credit market was conducted by former interim FCA chief executive Chris Woolard. The review found that the BNPL market almost quadrupled in size in 2020 and is now a £2.7bn industry, with 5 million people having used BNPL products since the start of the pandemic. The review also highlights that to let this growing market continue to go unregulated creates “significant potential consumer harm”, and states buy now pay later companies will be brought into the regulatory framework as soon as possible.
“As a matter of urgency, the FCA should work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation.”
The Woolard Review - A review of change and innovation in the unsecured credit market
To support the action, The Woolard Review identifies several areas in which BNPL products have potential to or have already caused harm to consumers:
Poor consumer understanding of BNPL
- There is a general misconception that BNPL is not a credit agreement and is more like a debit card payment. This can lead to a risk of consumers not being as careful as they would be with other credit products, and perhaps not giving full consideration to the consequences of failing to repay.
Misunderstanding of regulatory status
- Despite not thinking of BNPL as credit, many consumers still think that BMPL products are a regulated financial service and come with certain protections, such as the ability to be referred to the Financial Ombudsman Service (FOS). This confusion could easily hinder a consumer’s ability to make an informed decision.
BNPL offers working in favour of the retailer, not the consumer
- BNPL providers market themselves to retailers so they can increase sales. This creates a risk of BNPL being presented to the consumer in such a way that is detrimental to their interests.
- Advertising often creates a false sense of affordability. Failure to portray a balanced picture of the pros and cons of BNPL can encourage consumers to make impulsive decisions that play into behavioural biases.
BNPL is often presented as the default payment option
- When there is a lack of clarity around the different payment options a consumer has available to them, there is a risk of consumers being unable to make an informed choice. Some countries such as Sweden have already taken steps to prohibit credit options from being presented before debit options on online retail platforms.
Potentially exploitative of vulnerable customers
- BNPL providers need to be aware of the heightened risk to those with mental health issues and factor this into their design and presentation. Research as shown that people with mental health issues are more likely to make use of credit options, and that many common symptoms of mental health issues make it harder to manage money.
Not enough consideration of affordability
- BNPL providers manage credit risk through basic credit assessments, but do not have to report to Credit Reference Agencies (CRAs). This means that consumers that may not be able to afford to repay can go to other BNPL providers (who are unable to assess their affordability) and risk falling into serious debt.
Lack of clarity around late fees, defaults and collection practices
- BNPL providers vary on late fees, defaults and collection practices, which is often unclear. This runs the risk of the consumer not being able to make an informed decision. There is also a risk of BNPL companies incorporating late fees into their business model as a way of generating revenue.
Lack of transparency
- The fact that most BNPL providers don’t report to CRAs impacts the wider credit market, as other credit providers may end up lending to someone who cannot afford credit.
Expansion of BNPL
- Some providers are looking to expand beyond online retail and bring BNPL in-store. This will require staff training, and advertising must make consumers aware of the risks of BNPL products.
The human impact of an unregulated market
The FCA’s decision to regulate BNPL is preceded by months of lobbying by Alice Tapper, the founder of Go Fund Yourself, which aims to make personal finance more accessible and relatable to more people. Her campaign, which harnessed the hashtag #regulateBuyNowPayLater, sought to expose the dangers of BNPL products through the stories of real people who have had negative experiences with BNPL.
Ms. Tapper, who has previously described the lack of protection for BNPL consumers as “a classic case of regulation not keeping up with tech giants”, is delighted with the result.
“The absence of regulation is at the expense of consumers, particularly those who are young and vulnerable.
“Regulation means consumers will receive the information and protection they deserve. The FCA & Government now need to act fast to bring these recommendations into fruition. As Mr Woolard highlights, this is an urgent issue and there is no time for delay.”
Buy Now, Pay Later firms must prepare NOW
The rhetoric of The Woolard Review will be familiar to many of those working in financial services. BNPL regulation will be “outcomes focused”, ensuring positive experiences for customers and that good conduct is followed within the firm. Issues must be tackled “holistically”, and the FCA will seek to “set out a timeline for improving or updating systems”.
Culture and conduct is the hot topic in financial services, with Regulators and firms seeking innovative ways to demonstrate they are working in the interests of consumers and the market. Many are taking a principles-based approach, focusing on behaviours rather than rules. This has helped them encapsulate an overarching framework that covers more circumstances and helps protect against unknown risks.
Given the level of urgency with which the FCA are seeking to establish legislation, BNPL businesses should prepare now to avoid the risk of falling behind. Looking at FCA regulatory regimes such as the Senior Managers and Certification Regime (SMCR) may give BNPL firms some idea of what to expect, and the level of time and resource needed to satisfy the requirements. The use of legacy systems creates barriers to change and innovation, so BNPL firms need to be thinking about how technology can help them focus on effectiveness and demonstrate that things are working in practice.
Whatever lies in store for BNPL firms, they cannot let regulatory obligations become a burden and must act now to lay the foundations for operational excellence and compliance with the FCA buy now pay later requirements. Read more about risk management in finance by reading one of our latest blogs.