In February, the Financial Conduct Authority’s Woolard Review identified an ‘urgent need to regulate all’ Buy Now Pay Later (BNPL) products. The Government accepted the recommendation and said that legislation ‘will be brought forward as soon as parliamentary time allows’. That happened as part of the Financial Services Act 2021 at the end of April, which gave HM Treasury the power to bring BNPL under the FCA’s remit. The press speculated that the new FCA regulation would be announced in May.
But here we are, five months after the legislation changed, with no obvious progress and barely a day goes past without news about growth or deals in the BNPL market, most recently involving UK firms Butter, Payl8r and DivideBuy. Meanwhile the growth of UK market leaders including Klarna, Clearpay (the UK trading name of AfterPay) , Laybuy and PayPal continues at a pace. BNPL is surely the hottest part of the fintech world today, making the delay in regulation appear quite odd given the Government's statements.
Could BNPL regulation be proving more complicated than expected? Despite the delay, politicians calling for the regulation appear to be sitting on the sidelines patiently despite growing calls in the press for the regulation to be put in place. Could they have been told that the regulation, when it does appear, will be significant?
Here’s my speculative take on what the policy makers are grappling with and what we might now expect.
1. BNPL will be brought under the FCA’s remit by a clarification to the existing rules
As covered in more detail in my earlier articles, the only reason BNPL is not already regulated is that most providers are relying on an exemption that is specific to interest-free fixed term credit. An interesting exception to this is Butter, a fintech that operates on a regulated basis. It can be argued that most BNPL is actually revolving rather than fixed-term credit so the exemption doesn’t actually work. On that basis, all that’s needed is guidance from the Government and the FCA to that effect, or a minor adjustment to clarify the existing rules, and BNPL will be covered.
2. Claims management companies will be watching carefully
If such guidance or clarification was to be issued, it could suggest that some BNPL providers have either been trading without the required FCA authorisation, or have been authorised but not following the relevant rules that apply to regulated credit. Don't expect the Government or regulators to come out and say this, but claims management companies are likely to be watching developments carefully to see if they can argue that existing BNPL debts are unenforceable.
3. ‘Over the top’ solutions will prevail, if they can be made to work
A key impact of BNPL becoming regulated will be that retailers will need to become FCA authorised as credit brokers in order to introduce their customers to a BNPL provider. The FCA must surely be keen to avoid having to supervise many thousands more detailers, yet it also won’t want the risk of poor conduct in retail stores. So expect to see the FCA apply the existing credit broking rules in the FCA's Consumer Credit rulebook, CONC, in full for BNPL. That will make compliance risky and expensive for retailers and the checkout process far more complicated. In turn, expect many retailers to decide not to apply for FCA authorisation.
This could lead to greater use of ‘over the top’ BNPL solutions, where consumers have a BNPL 'virtual card' that can be used at any retailer. It’s probably a far better regulatory outcome, the only problem is that it’s unclear where the money is in that model, as there’s no subsidy from the retailer. But few seem to be worrying too much about minor details like that at this stage of the BNPL boom.
For more information on the UK BNPL market, please see my earlier articles at https://www.assetfinancepolicy.co.uk/blog/categories/consumer-lending-and-collections and details of available reports at https://www.assetfinancepolicy.co.uk/consumer-lending-market-analysis