As more of us shop online, the option to “buy-now, pay-later” is surging in popularity. Providing this BNPL service to customers has not been a regulated activity in the UK but this is likely to change following a review of the unsecured credit market. This follows similar moves by other countries to tighten the regulatory scrutiny of BNPL as it becomes more popular.

Bringing BNPL within the regulatory net

The UK government has confirmed that it will legislate to bring currently unregulated, interest-free buy-now, pay-later services into the scope of regulation. This follows the publication of the Woolard review into change and innovation in the UK’s unsecured credit market.

The Woolard review recommends starting to regulate BNPL products “as a matter of urgency”. The report justifies the move to regulate by pointing to the potential for consumer harm e.g. the risk that some individuals will take on unaffordable levels of debt. The urgency is justified by the significant growth in the BNPL market.

Not an unexpected move

Our payments team covered BNPL on our latest monthly payments podcast where we discussed recent calls to regulate BNPL.

Although some BNPL firms already have a UK licence, providing BNPL services is not itself a regulated activity because it falls outside the scope of payment service and consumer credit rules.

In particular, loan agreements can be exempt from consumer credit regulation where they are interest-free and due to be repaid within 12 months. Given that most BNPL agreements provide for repayment within 4-6 weeks, this exemption has allowed many BNPL firms to provide their services without needing to seek an FCA licence. It is likely to be this exemption which is limited by future legislation.

Some BNPL firms operating in the UK, including some of the larger providers, are already authorised. Regulating BNPL would likely mean that other providers would have to seek FCA authorisation. There would also be more consistency across the market in terms of the application of affordability assessments and whether customer complaints can be referred to the Financial Ombudsman Service.

The global comparison

The UK is not alone in scrutinising BNPL. For example, the payment method is also popular in Sweden and Australia which are home to two of the biggest providers: Klarna and Clearpay (aka Afterpay) respectively. Both countries have also recently tightened restrictions in relation to BNPL offers.

Last year Sweden prohibited e-payments providers from presenting credit options before debit options. This is to avoid BNPL offers being presented as the default payment method – something which the Woolard report also flags as a concern. In Australia, BNPL firms will be subject to new design and distribution obligations later in 2021.

Why has BNPL become more popular?

According to the report, the BNPL market nearly quadrupled in size in 2020. 90% of BNPL transactions involve fashion and footwear but in total the report estimates that the total value of BNPL transactions last year amounted to £2.7bn.

The market was growing before the Covid-19 pandemic but has risen rapidly as lockdown restrictions have moved more spending online.

Balancing benefits and risks

Broadly speaking the benefits of the BNPL model are:

• BNPL firms receive a fee from merchants in return for providing them with a new payment option to offer customers
• Merchants hope to increase sales from this service, which may also be cheaper for them than other payment options
• Customers get more flexibility about when and/or how they pay for their shopping online and interest-free credit

While acknowledging the benefits of BNPL, the report notes several concerns relating to the affordability of credit, the potential to create high levels of indebtedness, and varying approaches to late payment fees. Related to these are concerns about how BNPL offers are presented and promoted.

Background to the Woolard review

The Woolard review was commissioned by the FCA to explore how regulation should support the market for unsecured lending in the light of the pandemic, changing business models and growth in the BNPL market. The report makes 26 recommendations to the FCA.

What happens next?

The Treasury says that it will take this forward “as a matter of priority” and work with the FCA to assess the policy and legislative options for the government.