Government expands proposals to regulate BNPL

In October 2021, the UK government consulted on the possible regulation of Buy Now Pay Later (BNPL) and other short-term interest-free credit products following recommendations in The Woolard Review, which considered the potential for detriment to consumers. The government has subsequently announced that it is pressing ahead with plans to regulate these products in its response to the consultation.

How will the government regulate BNPL? Our payments and e-commerce expert Simon Deane-Johns explains in this article.

What is included in the proposed regulation?

The government sees little difference between BNPL credit facilities for multiple low-value purchases and more traditional short-term credit for one-off, higher-value purchases – especially where both occur online. As a result, the government intends to regulate both forms of short-term credit where they are provided by a third-party lender, as well as short-term credit provided directly by merchants online or at a distance (subject to further work to understand the number of merchants and sectors affected).

In-store short-term credit will be left unregulated because the government considers there is already enough ‘friction’ in the buying process to make consumers think twice about whether they can afford the purchase.

Retailers offering regulated short-term credit will not need to be authorised as credit brokers, unless they come to your home. But those merchants will need to have their marketing approved by an authorised person (such as their credit partner). The Financial Conduct Authority (FCA) will consult on the rules for those promotions in due course.

Consumers will also need to undergo credit checks before obtaining regulated short-term credit, and the government is engaging with the credit reference agencies to develop their approach to reporting BNPL products on your credit file.

The government plans certain requirements for the form and content of agreements governing regulated short-term credit, and how those contracts should be agreed with consumers. Breaching those rules would mean that the credit provider would need a court order to enforce the agreement. There will also be protection for consumers in financial difficulty, including FCA rules on arrears and default and the need to refrain from enforcing payment in certain circumstances.

Consumers will be able to refer disputes over regulated short-term credit to the Financial Ombudsman Service, which is likely to prove expensive for providers who usually have to pay the claim fees.

Regulated short-term credit providers would also be liable for their retail partner’s breach of contract or misrepresentation for purchases exceeding £100 (up to £30,000) under section 75 of the CCA.

Unintended consequences of regulation of short-term credit?

The government concedes that its proposed regulations will be broader than first intended, and will regulate scenarios that have not proved problematic in the past.

This also means that the government is working against the rising tide of online retailing by increasing ‘friction’ for short-term credit around those sales. Making those sales harder will not only annoy increasing numbers of consumers (especially where affordability is not an issue), but will also mean more costs for the retailers and higher prices for affected items generally, since the retailers cannot predict who will wish to pay by instalment. Ironically, therefore, the government’s plans are likely to be inflationary.

In addition, merchants who face the need to become regulated by the FCA to offer their own sales finance will decide to outsource the credit offering (if margins allow) to the same BNPL lenders whose activities the government says it is trying to constrain.