UK Buy Now, Pay Later (BNPL) Regulations

New Regulations Approaching for U.K. Buy Now, Pay Later Sector

In the wake of a governmental assessment, the U.K.'s financial regulatory body is set to receive instructions to oversee the buy now, pay later (BNPL) industry. This sector has gained significant prominence through companies like Klarna and AfterPay, which operates as Clearpay within the U.K.

Upcoming Consultation and Legislation

Currently, an additional consultation phase with industry stakeholders is in progress. Subsequently, pending available parliamentary time, new legislation governing BNPL services will be enacted.

FCA to Implement Stricter Controls

The Financial Conduct Authority (FCA) will be tasked with introducing more robust controls for interest-free buy now, pay later agreements. These controls will include requirements for firms to conduct more thorough affordability assessments prior to extending credit.

Furthermore, the FCA will ensure fair treatment of customers, with a particular focus on protecting those who are vulnerable or experiencing difficulties with repayments.

Addressing the Regulatory Gap

Until recently, the BNPL industry operated without formal regulation, as it fell outside the scope of existing rules governing interest-bearing credit products like credit cards. This lack of oversight left consumers with limited avenues for redress when issues arose.

The U.K. Treasury notes that “many consumers do not view interest-free buy-now-pay-later as a form of credit, so do not apply the same level of scrutiny.” Current checks by providers often prioritize the firm’s risk over the customer’s ability to afford the debt.

Concerns Regarding Credit Checks and Debt Visibility

Christopher Woolard’s review, conducted for the FCA, rightly emphasizes the shortcomings in credit checks and the absence of information sharing among lenders.

The Treasury highlights that “although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers.” It is relatively simple to accumulate approximately £1,000 in debt that remains invisible to credit reference agencies and traditional lenders.

Market Size and Consumer Usage

The review estimates the U.K. BNPL market to be valued at £2.7 billion ($3.7 billion). Since the surge in online shopping triggered by the pandemic, 5 million individuals have utilized BNPL services, with a significant number already carrying arrears from other credit products.

A Lag in Regulation

Previously, interest-free BNPL offerings from retailers were exempt from U.K. regulations designed to safeguard consumers from credit-related financial products. Alice Tapper, a financial campaigner who initiated the #regulateBuyNowPayLater campaign, described this as “a classic case of regulation not keeping up with tech giants”.

She explained that “the consumer credit act, written back in the 1970s was not drafted with algorithms and split-second lending decisions in mind.” This results in a lack of consumer protection, with no risk information provided at the point of sale or in advertising, and no guidance on debt collection or responsible spending.

Industry Response and Future Outlook

Klarna, for instance, has consistently stated it does not oppose further regulation. However, the specifics of the regulations, which are still under development, will be crucial.

Klarna CEO and co-founder Sebastian Siemiatkowski commented late last year, “I think good regulation that’s written in a meaningful way could make sense.” He added, “We’re not against it at any point, as long as it makes sense, as long as it’s equal for all players in the market.”