UK Aims to Tame ‘Wild West’ of the BNPL Sector

The British government is preparing to introduce new regulations for pay later companies.

As the Financial Times reported, the legislation, set to be introduced Monday (May 19), will put buy now, pay later (BNPL) providers under the same regulatory umbrella as banks, governed by the UK’s Financial Conduct Authority (FCA).

The rules will require BNPL providers to check whether a shopper can afford to take on debt before offering a loan. Borrowers will also be able to submit complaints about lenders to the Financial Ombudsman, the report added.

“These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow and create jobs,” Emma Reynolds, economic secretary to the Treasury, told the FT. “Buy now, pay later has transformed shopping for millions, but for too long has operated as a wild west — leaving consumers exposed.”

As the report notes, the BNPL market has flourished in recent years, letting consumers make payments in short-term, interest-free installments. The British Treasury says more than 10 million people in the UK use the product.

However, the industry has been unregulated, with companies not required to run credit checks on prospective users. Consumer advocates warn that borrowers risk racking up massive levels of debt from late repayment fees under the current system.

Klarna, one of the BNPL sector’s biggest providers, issued a statement to the FT in support of the legislation, saying “we look forward to working with the FCA on rules to protect consumers and encourage innovation.”

The UK’s efforts come 10 days after the state of New York released a budget that includes legislation to establish a licensing and supervision framework for BNPL providers. The legislation will include protections such as disclosure requirements, dispute resolution standards, limits on fees and charges and data privacy protections.

At the same time, BNPL regulation in the U.S. is being scaled back at the federal level. Earlier this month, the Consumer Financial Protection Bureau (CFPB) said it would revoke its earlier proposal to treat pay later providers like credit card companies.

Research from the PYMNTS Intelligence report “Cash Flow Shortages Drive Consumers’ BNPL Usage” shows that financially-strapped consumers are more likely to turn to pay later solutions than people experiencing less financial pressure.

“Among consumers who frequently experience cash flow shortages, 8.9% reported using BNPL in the past 30 days,” PYMNTS wrote recently. “This figure is more than three times the 2.5% usage rate reported by consumers without such financial challenges during the same period.”