Today – we’re publishing a new paper on Buy Now, Pay Later (BNPL): ‘Regulate Credit Now, Reform it Later.’
You can read our report in full here.
It’s a market that has exploded in recent years – providing consumers with a more flexible version of credit often denied to them under alternatives like credit cards. But this welcome innovation has created new challenges.
Today, BNPL is not a directly regulated activity and instead relies on an exemption from consumer credit rules under the Financial Services and Markets Act. The lack of regulation has led to inconsistent practices within the sector, including varying, or absent, affordability verification practices, payment schedules, fees, consumer protection policies and the complaints processes. The report comes after the Woolard Review of “change and innovation in the unsecured credit market” published its findings in February 2021, advocating for BNPL regulation.
That’s why we are proposing a robust and proportionate framework for the supervision of Buy Now, Pay Later (BNPL) products that will address these challenges without stifling innovation in the credit market. The regulation should also focus on providers of BNPL, not retailers, recognise the need to reform the antiquated credit rating industry, and seek to ensure consistency in marketing and customer redress processes.
We believe there should be five key tests for pragmatic and impactful regulation of the Buy Now, Pay Later market:
- Zero-in on regulating providers, not retailers. Placing the onus on the retailer would disproportionately increase administrative and compliance costs for e-commerce startups and SMEs relative to the large retailers who could afford compliance. Additional compliance requirements would lead 68% of e-commerce startups to stop offering BNPL solutions. 86% said that this would put them at a commercial disadvantage to larger players, as it would prevent them from being able to offer a customer experience that is increasingly in demand.
- Require providers to develop processes that track affordability. Importantly, this requirement should not be for a “hard credit check”. These checks cost a premium dictated by the big three Credit Rating Agencies, while the prospect of receiving 5 ‘credit checks’ for taking out five BNPL loans totalling £350 is hardly proportionate. In contrast, affordability tracking should be proportional to the risk involved: a possible solution could be to leverage Open Banking through providers like Aire to assess affordability, particularly as this would give providers visibility of existing customer liabilities with other BNPL firms.
- Drag the credit rating industry into the 21st Century. Use Smart Data regulation to prise open the Credit Rating Agencies’ treasure trove of data that should actually belong to the customer.
- Tighten consumer communications. Regulators could look into mandating the reporting of metrics that demonstrate consumers have been provided with adequate information about the payment method, such as complaint volumes and complaints upheld by the Advertising Standards Authority. Bad practice by either merchants or BNPL providers should be held to account and an effective customer redress mechanism should be introduced.
- Provide a better customer redress model. The FCA should review the impact of regulator complaints rules on competition in retail financial services markets. It should also consider whether a single ombudsman service for the whole financial services industry is still the right approach.
It is vital that the benefits of BNPL are not lost in the process of regulation. As our paper shows, there are challenges to be tackled – but to apply a blunt implement under the auspices of avoiding consumer harm would be to throw the baby out with the bathwater and risk the very harm to consumers it attempts to address through the mistaken removal of a consumer-friendly credit option.