Today’s Woolard Review of change and innovation in the unsecured credit market has got it wrong on Buy Now Pay Later and the wider Retail Point of Sale Finance Market. Consumers in this market would benefit from smarter enforcement of existing regulation, rather than the proposed new legislation that could bring many thousands more small bicycle shops, dentists or heating engineers into the Financial Conduct Authority’s remit.
The main headline news from the Review is that short-term Buy Now Pay Later (BNPL) providers, such as Klarna, Clearpay, LayBuy, Openpay and PayPal, should become regulated. The FCA should work with the Treasury to ensure the necessary amendments to legislation, the report recommends.
Woolard’s Review seems to have failed to consider whether the exemptions that are assumed to apply to short-term BNPL really work. They don’t. The 12-month exemption applies only to fixed-sum credit. If the BNPL providers operate with credit limits - as several of the firms’ websites clearly show that they do - they are actually providing a form of running account credit. There is an exemption for interest-free running account credit, but it doesn’t fit what these firms do. (For more details on this, see my earlier blog and report).
The FCA already has the power to regulate these firms, if only it reaches the view that they are engaged in providing running account rather than fixed sum credit. It’s a shame Woolard hasn’t considered this, because if the regulation is extended it’s bound to capture the wider 12-month interest-free Retail Point of Sale Finance market that has operated without significant problems for many years.
Whether it’s paying for a bike, a sofa or a vet bill, consumers appreciate the opportunity to pay through interest-free installments over a year. If this exemption for fixed-sum credit is removed, the consequences are serious:
Many retailers or service providers will stop offering the option, making it harder for consumers to manage their finances.
The FCA will have to take on direct or indirect (where Appointed Representatives are used) regulatory responsibility for thousands more non-financial businesses that currently broker only exempt credit
Retailers and service providers that become authorised (directly or indirectly as ARs) are more likely to stop subsidising finance and offer charged-for credit over longer periods, significantly increasing risks for consumers compared to 12-month interest-free credit.
None of this is necessary or will help consumers. The FCA should take a bold line on BNPL and start to supervise the providers under the existing rules. The Treasury should resist any calls for it to extend the responsibilities of the FCA even further into non-financial businesses and, if anything, review whether it makes any sense at all for our national financial services regulator to have responsibility for tens of thousands of non-financial businesses, rather than relying on lenders to ensure that the full customer journey is fully compliant.
Today’s announcement may have generated the headlines the FCA was looking for. It hasn’t done what’s right for the consumer or the tens of thousands of small businesses providing goods or services to them that offer interest-free credit.