Buy Now Pay Later Schemes are to be Regulated by the FCA

Buy Now Pay Later Schemes are to be Regulated by the FCA

On the 2nd of February 2021, the Financial Conduct Authority announced that Buy Now Pay Later (BNPL) schemes will be bought into financial services regulation.

What are BNPL schemes?

BNPL schemes are a form of credit agreement that allows consumers to purchase products and pay for them later. Companies such as Clearpay and Klarna – the industry leaders, offer buyers the option to pay off their purchases in instalments, often with interest on top, over a period that is usually between 30 days to 1 year.

These schemes have seen a surge in popularity over the past year, partially due to the coronavirus pandemic, with the use of BNPL almost quadrupling in 2020, up to a total of £2.7bn.

Online shopping is at an all-time high, and an increasing number of retailers are offering the use of BNPL schemes at their checkouts.

Why does the FCA want to regulate BNPL?

In a review into the unsecured credit market lead by Christopher Woolard CBE, the FCA found that 1 in 10 customers of one major bank were already in arrears from the use of BNPL schemes.

In his letter to the Treasury, Christopher Woolard said:

Based on the work of the Review, I am going to recommend that exempt BNPL credit agreements are brought within the FCA’s perimeter. Given the pace of growth in the market, I believe this recommendation needs to be acted upon with real urgency.”

Commentators say that because BNPL schemes are not currently regulated, buyers can use multiple BNPL schemes at one time, often without realising how much debt they are building up.

The FCA believes that many consumers who use BNPL schemes don’t realise that they are credit agreements and are subject to late payment fees if not cleared in the agreed time. Missed payments could also harm users credit scores.

Consumers are also often unaware that these schemes are not regulated and are not protected if something goes wrong.

With the use of BNPL schemes rapidly increasing, the FCA are concerned about how easy it has become for consumers to rake up massive amounts of debt without realising.

Though we don’t know when this regulation will come into effect, there have been warnings from a number of cross-party MPs that BNPL schemes could end up driving people into unsustainable debt, much like payday lenders did before the 2014 crackdown.

What Regulation will mean for BNPL

With the FCA bringing these schemes under regulation, BNPL firms will have to start conducting the proper affordability checks before lending to consumers whilst also having to provide the appropriate support to those who are struggling to repay the money they’ve borrowed.

Regulation under the Consumer Credit Act will also give shoppers the right to complain to the Financial Ombudsman if things go wrong.

Essentially regulation will mean that BNPL will be under the same scrutiny that other types of credit are, such as credit cards and loans.

New rules on Advertising BNPL services

As well as the FCA, the Committee of Advertising Practice (CAP) have also published new guidence setting out new restrictions for advertising BNPL schemes.

According to the National Law Review:

The regulator’s new rules stress the importance of:

Providers making it clear that there are other payment options (i.e. standard payment), particularly when the BNPL option is presented in the form of a card detail entry form.

In keeping with maximising transparency, although providers may provide a link to a full set of terms & conditions, significant conditions (including fees, payment schedules, and penalties) should be clear as part of the checkout process, rather than being made accessible via a link.”

This guidance will change when the FCA regulation comes into place, but for now they ensure that BNPL services are transparent when being offered to customers.