The BNPL consultation in the UK has now closed. What did it cover, and what does it mean for banks?
In February 2023, the UK government released a consultation on draft legislation for Buy-Now Pay-Later (BNPL) services, which outlined the scope of the proposed legislation as well as some exemptions.
The proposed legislation aims to prevent consumers getting into unmanageable debt while still allowing them the option to spread the cost of their purchases over a longer period of time. This is a welcome milestone amidst the cost-of-living crisis in this age of high inflation and interest rates.
Building on the Woolard Review in 2021 and the subsequent consultation response in June 2022, the latest consultation on draft legislation suggests that regulation will be limited to fix-sum credit and interest-free repayable instalments provided by third-party lenders. This is a change to its previous position and means that agreements offered directly by merchants would be out of scope either online or at a distance. Trade credit is also currently exempt from this regulation.
It further outlined those in scope would be subject to controls including provisions for financial promotions, creditworthiness assessments and pre-contractual requirements.
Expected in the latter half of the year, the legislation, as it stands, aims to ensure that BNPL providers operate in a fair and transparent manner. Below we outline why affordability checks, complaint management, credit reporting, limitations on charging rates and advertising are just some of the key considerations you should pay close attention to.
According to the draft legislation as it currently stands:
- Affordability Checks: BNPL providers should be required to carry out more thorough affordability checks before entering into an agreement with a consumer. They will need to assess whether the consumer can afford the repayments and ensure that the agreement suits their financial circumstances. The FCA is determining how current rules on creditworthiness should be tailored to BNPL.
- Complaints Management: To protect consumers from falling into problem debt, BNPL users will be allowed to take their complaints regarding the conduct of BNPL providers to the Financial Ombudsman Service (FOS) as outlined in the draft legislation.
- Limits on Charges: There should be limits on late payment fees and other charges, with pre-contractual requirements providing straightforward and transparent information about these charges upfront. As such, consumers should be better informed about the costs of using BNPL and not subject to excessive penalties.
- Credit Reporting: BNPL providers should report their customers’ payment performance to credit reference agencies. This would allow consumers to build their credit scores, which are helpful when applying for future loans or other credit products.
- Regulation of Advertising: The Financial Conduct Authority (FCA) will likely have the power to regulate BNPL advertising to help ensure that it is clear and fair, isn’t misleading, and provides consumers with accurate and relevant information.
Impact on BNPL providers
BNPL providers are likely to bear the financial burden of the proposed legislation. Additional operational costs incurred to enable credit reporting will be compounded by the need to invest in affordability checks to guarantee that their BNPL agreements are compliant.
Providers may also have to reassess BNPL products, to balance new operational costs with the likelihood of basket sizes dropping as consumers become more conservative with their spending and reluctant to undergo financial checks. This could see a reduction in BNPL options at checkout as providers seek to lower overall costs.
Impact on Banks
While traditional BNPL providers will likely need to make significant changes to align to the upcoming regulation, banks can find themselves in a good position in the face of legislative change given they will be FCA compliant from the outset.
We’ve previously explored how banks can find success with BNPL. With their large balance sheets and robust checks and balances, banks truly are best placed to capitalise on their trusted brand to promote responsible lending products.
“While under 3% of consumers globally use (BNPL) for most of their big-ticket purchases today, an additional one-third said they would be more willing to do so if it were offered by their primary bank.”
– 2022 Accenture Global Consumer Payments Survey
Impact on Consumers
The expectation of greater transparency and flexibility through regulated advertisements and limited charges will aid consumers in making more informed decisions on the overall cost of BNPL—key to protecting them from excessive debt and financial hardship. That, paired with the prospect of building credit scores over time, will be welcomed by consumers.
As the final regulation approaches, it is imperative to continue to closely monitor this space for any major changes to what has so far been communicated. There is little doubt that the upcoming regulation will lead to a more responsible and sustainable BNPL sector—a change we expect will be warmly welcomed in the face of economic uncertainty.
Contact me to see how your business could fare ahead of the upcoming BNPL legislation.
To learn how your bank can offer BNPL responsibly, read our report, Finding success with BNPL: Strategies for banks to get it right. And for strategies to stay relevant in payments, read Payments gets personal, our report on our latest global consumer payments survey.
I would like to thank Ewa Wojcik, Aisha Vadher and Sakshi Kaushik for their generous contributions to this post.
