Regulating Buy Now Pay Later
Gavin Stewart, Director in Grant Thornton’s Financial Services Group, spent 27 years as a regulator at the Bank of England, Financial Services Authority and Financial Conduct Authority. Here he looks at the path to regulating the Buy Now Pay Later market.
The headline recommendation of the Woolard Review, published in February, is that “the unregulated BNPL market … poses potential harms to consumers and needs to be brought within regulation to both protect consumers and ensure it is sustainable.” What is regulation likely to mean in practice?
Given the growth of the Buy Now Pay Later (BNPL) market, which more than tripled in size during 2020, and the review’s short duration – less than four months, including Christmas – the recommendation was probably semi-baked in from the outset. So it’s no surprise that the Financial Conduct Authority (FCA) accepted it and that its letter to John Glen, the relevant minister, assumes HM Treasury will do likewise.
Future timeline
Bringing BNPL into regulation would need primary legislation and the FCA clearly hopes this can be included in the Financial Services Bill presently going through Parliament. Assuming this proves possible, it might realistically take another two years for the FCA to design and consult on a suitable regime, and for firms to prepare for its introduction.
Given the long-term drop in UK household income due to COVID-19, the FCA will need to make important decisions against the background of a stressed environment and a fast-growing BNPL market.
One will be how to apply affordability rules to a market where firms currently make only a soft assessment, largely based on whether previous loans are repaid. Another will be how to assess whether consumers primarily use BNPL in addition to more traditional credit sources, or instead of them.
Regulatory approach and resourcing
While the scale of the BNPL challenge is much smaller, it is useful to look back at the FCA’s consumer credit experience for pointers as to how it might design and then resource BNPL regulation.
When it took on responsibility for consumer credit in 2014, the FCA was faced with a steep learning curve, and forced to assess the risks posed by consumer credit business models during the authorisation process. Given the number of firms and the tight timescales, this proved a predictably difficult challenge.
Financially meanwhile, the FCA originally agreed to regulate consumer credit on a budget of c.£40mn per annum, considerably less than its own assessment but roughly quadruple that of the Office of Fair Trading licensing regime that preceded it. Given its size and the high proportion of vulnerable consumers, this budget proved insufficient and, over time, the FCA has had to devote more resource to the sector.
The clear lessons are to find out as much as possible about a market before designing its regulation, and to set a realistic level of fees at the outset. But these are easier to talk about than to implement; information on unregulated sectors is always likely to have large gaps, and resources will always be limited.
For BNPL, since the FCA can only charge fees for new regulation from firms undertaking that activity, the relatively small size of the market will constrain the resources the FCA can allocate and the approach it can adopt. Those looking for bespoke regulation of BNPL may therefore be disappointed – a small fee base makes it harder to justify specialist teams and dedicated headcount.
On the positive side, however, the FCA’s integration of its policy and supervision functions, and the broader efforts to break down silos, should help deliver a more coherent strategy. And the new BNPL regime should also benefit from the FCA’s improving systems and its emerging data-led strategy.
Wider environment
None of this will take place in a vacuum of course. When the FCA took on consumer credit it was opposed to price caps, but political pressure around payday lending soon resulted in a reversal of this position. BNPL is already a focus of political attention, and if this grows it could well influence the FCA’s approach.
Another, related, factor will be how well BNPL business models work during the remainder of the COVID-19 crisis, including the volume and profile of complaints the firms receive. This will influence the design of the FCA regime and provide a sense of the long-term viability of current BNPL business models. Alongside some potential advantages of BNPL, the Woolard Review lists a rather larger number of potential harms, and COVID-19 is likely to show which, if any, of these are significant.
Conclusion
Given its rapid growth and relationship to consumer credit, regulating the BNPL market is an obvious call, and the firms themselves have welcomed the inevitable prospect. The more difficult questions are around the FCA’s design of the regime and the resources it should allocate.
Assuming two years for BNPL regulation to come into effect seems a long time, but would likely prove a tight timetable and there will be some fine judgements to be made along the way.