On Jan. 6, the U.K. Treasury closes a public consultation on buy now, pay later (BNPL), with the clear intention of bringing BNPL products into a regulated legal framework.
As they benefit from an exemption in the law for short-term credit-free credits, BNPL products are still unregulated in the U.K.
As a brief description, BNPL products allow consumers to make a purchase, enjoy the good or service and then pay for it later. Repayment is where BNPL is different than credit cards — payment is in equal installments over a specified period of time, usually up to four months, without any interest as long as the consumer pays on time.
However, missing a payment or spreading the cost over a longer period of time could result in late fees, penalties or high-interest rates. Interest rates are also pegged to the credit risk of the borrower — more risky consumers can obtain a BNPL loan, but at a higher interest rate.
A recent report commissioned by the U.K. government identified a number of areas of potential consumer harm if the BNPL market continues growing, as it is expected, while being unregulated.
As such, this consultation seeks to gather information from relevant stakeholders and the public, not to decide whether to regulate or not, as this is most likely to happen, but rather to design the scope of the regulation and ensure this measure is proportional to achieve its main goal — namely, to protect consumers.
While the initial consultation has been carried out by the U.K. Treasury, if this institution decides this area should be regulated, it will delegate responsibility on the Financial Conduct Authority (FCA), who will develop the rules.
Interestingly, any potential regulation on BNPL would need to be carefully drafted not to include other non-financial organizations that rely on the exemption mentioned above to offer delayed payment of goods or services, like healthcare services or gyms.
According to the questions laid down in the consultation paper, some of the areas where regulation is likely are:
There are numerous questions and concerns about how BNPL works, including which parties are involved in the transactions, the average number of transactions per consumer, the amount spent per transaction and what new BNPL models could be developed in the future.
The answers to these questions may offer regulators enough evidence to introduce limits to the amount of transactions that a customer could undertake for a certain period of time.
Questions on the differences between long-term and short-term credit suggest that regulators are wary that consumers may not fully understand the differences between the two — or understand the potential risks of incurring late payments.
This could prompt regulators to establish new requirements on BNPL companies to inform the consumers of the potential risks, perhaps by adding additional boxes during the checkout to ensure the consumer is fully informed.
Any potential regulation on BNPL may need to draw a legal boundary between the different types of short-term interest-free credit. Although there are many similarities between BNPL and other short-term credits, there will likely be a new definition that will determine under which regulation they fall.
This new definition should also include possible modifications of BNPL products, ensuring the new products don’t benefit from the legal exemption that other short-term interest-free credits enjoy.
Although BNPL companies need to observe certain rules by the U.K.’s Advertising Standards Authority, the consultation suggests that BNPL companies may be subject to more stringent rules established by the FCA under the financial promotions regime.
As this requirement could impose an unnecessary burden on merchants to request approvals for promotions of BNPL products, which eventually would benefit the large merchants, it isn’t clear if this point would be included in the regulation.
Because BNPL is not currently regulated, there is no obligation to conduct creditworthiness assessments as part of either the onboarding of new customers. However, to protect consumers from high levels of debt, new regulation on BNPL is likely to apply the FCA’s current rules on creditworthiness to these agreements.
It is difficult to predict at this point how light or burdensome the regulation will be, but the responses to this consultation — which may be published in the following weeks — could give us a hint on the most pressing issues. In any event, regulators are likely to propose new rules in the first half of the year, given the urgency of this matter to the government.