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Information sheet about Buy Now Pay Later

The Financial Conduct Authority (FCA) has recently published a review of change and innovation in the unsecured consumer credit market where it focussed on unregulated BNPL products. This information sheet aims to assist readers by providing a background of what BNPL products are, giving a summary of the FCA review including resulting changes to expect and links to further information.

March 2021

What is BNPL?

BNPL refers to a variety of credit agreements, some of which currently fall outside the FCA’s remit due to an exemption dating back to the Consumer Credit Act 1974. These agreements typically allow users to purchase goods on credit and pay over a set period of time or in instalments without paying interest.

However interest may be applied if customers do not pay the balance according to the agreement.

BNPL firms offer these products both in-store and online and they have proved particularly popular with young people. In 2020 the market for BNPL products almost quadrupled to a sales value of £2.7bn and 5 million customers as more and more shoppers moved online with the on-set of the Covid-19 pandemic. Recent data has indicated that 25% of users are aged 18-24, 50% are aged 25-36, 75% are female and 90% of transactions involve fashion and footwear. (Source: https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf, paragraph 4.16)

Why use a BNPL product?

Used appropriately, BNPL products can provide benefits to their users. Given that BNPL products often allow consumers to spread the cost of a purchase by paying in instalments over a period of time this allows consumers more flexibility to manage their cash flow. In addition, whereas alternatives such as credit cards will typically charge interest, most BNPL products are provided to customers interest-free assuming customers stick to the repayment schedule.

What are the concerns?

The rapid growth of BNPL products has raised a number of concerns. Customers may be tempted to spend more than they can afford particularly those with a poor or thin credit history who may be attracted by the instalment plan payments offered by BNPL products. BNPL providers are not currently required to perform full affordability assessments on individuals and there may be insufficient protection offered to vulnerable customers.

Customers’ understanding of BNPL products may also vary significantly and they may incorrectly assume that the product is already regulated with the associated rights and protections that gives.

They may be further confused by multiple BNPL products being offered by a retailer for a single purchase, even as the default payment option, potentially with the detail around the consequences of not repaying (e.g. interest) buried in the terms and conditions.

Given BNPL activity is not generally recorded by credit reference agencies it can also be easy to accumulate debt across different lenders without each being aware. One bank has found that one in 10 customers already had debt arrears elsewhere when they used BNPL. (Source: https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf, paragraph 4.39)

What’s happened recently?

Given the increasing levels of concern over BNPL products there has been a growing narrative to take action now after more than 70 MPs warned that BNPL could be “the next Wonga waiting to happen” with reference to prior issues experienced with payday lenders and people forced into high levels of debt. Labour MP Stella Creasy said that “regulation cannot come soon enough”.

In February 2021, the FCA published the Woolard Review (the Review) which performed an analysis of change and innovation in the unsecured credit market with a particular focus on unregulated BNPL unsecured lending. The Review set out how regulation can better support the market for unsecured lending taking into account the impact of the coronavirus (Covid-19) pandemic, changing business models and new developments in BNPL unsecured lending. It recommended an urgent need to regulate all BNPL products recognising that BNPL could lead to significant consumer harm.

As well as recommending the need to regulate, the Review also provided a further 25 recommendations including in areas such as:

  • Debt advice being available to help those people that are struggling;
  • Continued support for consumers to manage forbearance which may have been heightened due to the Covid-19 pandemic;
  • The need for more alternatives to high-cost credit in the market; and
  • Reviewing repeat lending.

The FCA has announced it has welcomed the Review and supports the recommendations it raised, agreeing there is a strong need to regulate BNPL business. The FCA has written to the Economic Secretary to the Treasury setting out the FCA’s view and proposing that the FCA works with the Government to design the appropriate regulation.

What should we expect to happen next?

The overarching finding from the Report was the need for regulation, which is now expected to be introduced in due course, which carries with it a number of implications for both BNPL firms and customers.

Amongst the regulation, firms will be required to conduct up-front affordability checks in order to verify that people are not taking on too much debt. Firms will also be required to ensure that customers are treated fairly if they run into difficulty repaying the loans.

This increased regulation will potentially increase the compliance cost and burden on BNPL firms potentially impacting their core business models and require firms to consider how they operate going forward.

Firms will need to consider how regulation will effect customer appetite for BNPL products in the future and if this, in turn, will have an effect on the volume of retail sales.

Customers will also have the ability to take their complaints relating to BNPL products to the Financial Ombudsman Service for an independent adjudication whereas this ability is not currently available. 

Do you want to know more?

The issues surrounding BNPL products have been prominent in the news over the past few months and this is expected to continue as the Report’s recommendations are implemented over time. In the meantime there are a number of sources of more information and assistance that may prove useful.

For individuals who are currently using BNPL products or are considering doing so in the future advice can be sought through financial advisers and debt advice bodies. For further information, the links below provide the detailed Report and the FCA’s letter to the Economic Secretary of the Treasury.