UK Treasury Opens BNPL Consultation | VIXIO

UK Treasury Opens BNPL Consultation

The buy now, pay later (BNPL) phenomenon comes to loggerheads with regulators as HM Treasury opens a consultation on how it should be overseen.

In February, the UK government announced its intention to bring unregulated and interest-free BNPL products into regulation, given what it described as “the potential risk of consumer detriment highlighted in the Woolard Review”.

The principle of proportionality is important across any regulatory intervention, the government said, considering it is always a balance to be struck to ensure that consumers are given appropriate protection, without unduly limiting the availability and cost of useful financial products.

“In just a couple of years we’ve seen BNPL go from being a niche payment option used by just a handful of early adopters, to becoming a major feature of the UK credit market,” said Jayadeep Nair, chief product and marketing officer at Equifax UK.

It is not often that such habit-shifting innovation comes along in the world of finance, so this is an incredibly exciting time for the sector, and a change that the Treasury is rightly determined to get right, he continued.

The government has said that its principles are ensuring that the scope of the new regulations is defined as closely as possible to target those products where there is potential for consumer detriment.

It also plans on calibrating the regulatory controls that are put in place for BNPL so that they are adapted to the business model and focused on those elements of lending practice that are most closely linked to the potential consumer detriment in this market.

Overall, the consultation intends to gather evidence based on several key objectives:

  • BNPL activities should be subject to an intervention that is proportionate to the level of risk that they present, and that it is not so burdensome that it inhibits the product being offered or reduces consumer choice.
  • Consumers should be adequately and fairly protected from detriment, and can access dispute resolution regarding the conduct of lenders.
  • Regulation for BNPL should not adversely affect competition and innovation across the wider consumer credit and payments markets.
  • Any burden on merchants offering BNPL as a payment option would be proportionate and manageable and should not disadvantage small and medium-sized enterprises (SMEs) over larger merchants.

At present, unsecured consumer credit is regulated under the framework provided by the Consumer Credit Act 1974 (CCA) and the Financial Services and Markets Act 2000 (FSMA).

Broadly, a consumer credit agreement is defined as arrangement of a cash loan or other financial accommodation granted to an individual. However, many BNPL products and services can fall outside current definitions.

These, according to the government, typically split the cost of a purchase from a merchant, for example, a retailer or a supplier of goods and services, into several equal amounts taken at regular intervals, usually monthly, weekly or fortnightly.

BNPL can also come in other forms such as a simple deferred payment. This is where a  lender provides a period of time in which a customer does not have to pay, with payment then taken from the customer’s account a set time after the purchase is made and only then if the item is not returned by the customer.

“This product is often used by those who want to ‘try before they buy’, particularly clothing,” the consultation points out, noting that no interest is charged on these agreements.

“BNPL differs from many traditional lending products, but it is no less fundamental that consumer data and borrowing behaviour is reflected in credit files,” said Nair.

The more insights lenders have available, the more confidently and accurately they can undertake affordability assessments, lend with confidence, and ensure fair outcomes for consumers, he continued.

“Confidence in the credit system is fundamental to the UK’s economic recovery,” said Nair, pointing out that as a credit reference agency his company is committed to working with the government, the Financial Conduct Authority, BNPL providers and consumer groups to make sure that when the change happens, consumers are fully aware of the implications of BNPL products on their credit standing.

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