UK government outlines plans for regulation of buy now pay later industry

The buy now pay later industry has exploded in recent years, with the industry now worth $100 billion (circa £70 billion).

Also known as BNPL, it is used by shoppers to delay payments on any kind of product from champagne to clothes and kitchens, and the option to pay nothing today and repay over 12 months in instalments or one lump sum, either interest-free or a little interest on top.

While the Financial Conduct Authority requires anyone offering consumer credit to be authorised, this is not currently the case with BNPL. The industry remains unregulated if customers make no more than 12 payments within 12 months or less and many other businesses are able to use this exemption including invoice financing, season tickets and white goods.

But given the size of the industry and its huge presence online, the FCA has been putting measures in place to introduce regulation to BNPL. In particular, the regulator wants to raise awareness about the offers that are being promoted to customers, the role or absence of credit checks, the costs involved and understanding of the product by consumers.

A consultation to regulate the industry was announced by the HM Treasury on 21 October 2021 and responses to be provided by the government by 6 January 2022. We hear from experts in the consumer finance space to get their thoughts on introducing regulation to BNPL.

Is regulation for buy now pay later a good thing?

David Green, head of brand at Fund Ourselves said: ‘Introducing regulation would be welcomed. A lot of online purchases through different websites are sometimes so quick that the majority of customers do not fully understand how buy now pay later works and the potential implications of non-payment.

‘Buy now pay later has a lot of advantages for the website selling the product, the third-party processor and of course, the customer. But there is certainly a case for having strong credit and affordability checks in place and making sure that customers are aware that late fees apply for missing payment and how this could impact their credit score.’

David Beard, CEO of price comparison Lending Expert said: ‘Adding new regulation for buy now pay later is a good thing and can certainly be done in a way that all parties benefit from it.

‘Too much regulation has been introduced in the payday and guarantor industry and this has made it hard for lenders to be profitable and has caused a huge exodus in the industry. Ultimately, the customer suffers because they can no longer access the product they need, so finding the balance is key.

There is bound to be a percentage of customers that use buy now pay later and are accumulating a lot of debt behind the scenes, building up a balance which will eventually be sky-high. Hence, with more stringent checks and better transparency about the products available, some new regulation could add a lot more protection to vulnerable customers.

What rules should be introduced?

Dan Kettle, founder of finance provider, Pheabs.com, said: ‘Much like the regulation for high cost loan products, providers are required to provide a repayment example and warning label whenever they are trying to sell a product or an application. Some very basic warning signs and payment examples would certainly be welcomed in the buy now pay later industry.

‘It is so appealing to simply buy something today and worry about the payment tomorrow, that people who do not even need to borrow money are very drawn to this attractive proposition. But it would certainly be worthwhile to make it more transparent that money is owed at a certain point and that non-repayment leads to late fees and could negatively impact your credit score.’

Richard Dent, of Finger Finance, said: ‘Credit checking should become part of the buy now pay later experience. Currently, the suppliers are running soft checks or no checks at all and this is unfortunately giving credit to people who cannot afford it.

‘Whether it is credit checking for each customer or for purchases over a certain amount, this could help match customers with products that they can afford, rather than being left with debt further down the line.

‘The long-winded and strict authorisation process is probably not well suited for buy now pay later — but if authorisation is introduced, certainly a fast-tracked or toned down version could be merited.’