Tightening BNPL regulations in the UK

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The tightening of Buy now, pay later (BNPL) regulations could be welcoming for credit card issuers as BNPL would fall under FCA umbrella leveling the playing ground between credit cards and BNPL providers.Tighter regulations would also bring greater transparency in the system and less debts for customers since their credit history will be checked to gauge their affordability minimizing payment defaults. Regulations could impact how retailers offer BNPL options as they will be required to become authorized for credit broking. Smaller retailers with no authorization are likely to opt out of these payment options to avoid additional risk. Hence, strict regulations are unlikely to impact the growth of the sector as it offers benefits to customers who use it responsibly.

BNPL has gained immense popularity during the pandemic, as consumers shifted to online shopping due to COVID restrictions. According to PayNXT360 estimates, the BNPL market in the UK stands at over US$11 billion, with 9 million people using BNPL products in 2020. BNPL products which are presently exempted from regulation are expected to be regulated as they are increasing in popularity.

In June 2019, the Financial Conduct Authority (FCA) in the UK introduced BNPL rules, which claim to help consumers save £40-60M a year in interest payments. As part of the rules, market players should avoid charging backdated interest at the end of promotional period. Also, FCA redefined BNPL credit and required BNPL companies to provide information on how interest will be charged if the BNPL offer is not repaid within a specific period.

The firms are obliged to disclose the principal amount on which interest will be charged, the date from which it would accrue and the interest rate applied. The same disclosure rules are applied for BNPL financial promotions as well. The rules also require firms to timely and clearly communicate to customers before a BNPL offer period comes to an end.

The BNPL firms are expected to face strict regulations as it usage has significantly increased. The UK treasury announced BNPL firms will be under supervision of FCA which regulates financial services firms and markets in the UK. The firms are expected to conduct affordability checks before lending to customers and raise complains in case of any defaults. Regulating BNPL is to ensure consumers are treated fairly and are offered agreements they can afford.

Moreover, in the unsecured credit market review conducted by former interim chief executive Christopher Woolard and published in February 2021, FCA revealed that the money lent in unregulated transactions would put customers in financial difficulty. The FCA discovered that over 10% of one bank’s customers using BNPL were already in arrears. Hence, concluding that regulation was vital to protect customers from unregulated BNPL transactions.