BNPL regulation is now confirmed, but what does that mean for the firms that provide it and their customers?
Plans on how Buy Now, Pay Later (BNPL) services will be regulated moving forwards were announced by the government earlier this year in response to a 2021 consultation on the topic.
The government said it plans to draft legislation to regulate BNPL firms towards the end of this year with the new rules anticipated to take force in 2023. This is because the Financial Conduct Authority (FCA) will also need to consult on the proposals from the middle of next year.
With Buy Now Pay Later, instead of paying at the till or online checkout, the BNPL firm pays the retailer on behalf of the consumer, who then agrees to pay the BNPL firm back over the course of a few weeks or months, meaning that people can spread their shopping costs.
It's interest-free and fee-free but to miss a repayment means risking being charged late fees.
What could the proposed rules mean for consumers?
The government says it expects the new rules will require that:
Consumers face tougher affordability checks
Currently, most major BNPL lenders, including Clearpay, Klarna and Laybuy, opt for 'soft' credit checks to judge a person’s ability to repay before agreeing to lend. This means that people won’t see a mark on their credit file.
In future, it's expected that firms will have to undertake 'hard' credit checks to assess customer affordability, which will leave a mark on credit files and could impact an individual’s ability to get credit elsewhere.
It is, however, worth pointing out that Klarna has opted to report customer data to a selection of credit reference agencies, which means a person’s BNPL habits can already be looked at by other lenders.
Lenders ensure advertising isn't misleading
Buy Now Pay Later firms such as Clearpay, Klarna and Laybuy will be required to follow new advertising rules which will ensure that BNPL advertisements aren't misleading. They will also need to make it clear that BNPL is a form of credit.
The FCA ensures the new rules are being met by BNPL firms
Lenders offering the service will need to be approved by the FCA in order to lend to consumers.
Consumers can complain to the Financial Ombudsman Service (FOS)
Currently, the only way for most consumers to complain about BNPL firms is directly to the firm itself.
However, the new legislation is designed to give consumers increased protections by enabling complaints to be taken to the FOS if the lender has failed to respond or if complainants are unhappy with the response they do get.
This change will mean complaints procedures for BNPL firms become aligned with those of traditional lenders.
Ellie Sykes, our Credit Risk & Analytics Consultant, provided her insights around the new regulations…
“I think it is a largely positive move that the regulation in the BNPL space is changing. More protection for consumers who rely on credit is a good thing, especially with regards to the advertising of credit products, as well as the change in the complaints procedure to make sure everyone is treated fairly.
“My concern is that, in the current (and worsening) economic climate, buyers are required to use BNPL as their only option and therefore more hard credit checks are going to have an impact, especially with inflation and base rate increases.
“This means that these BNPL businesses need to have a robust and experienced credit risk function, ideally with strong knowledge of affordability and collections strategies, something that I have been recommending since last year.”
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