HMT's consultation on regulation of the buy now pay later (BNPL) sector has now closed. Jarred Erceg and Stephanie Larivee review the industry response and how regulatory changes could affect BNPL firms.

UPDATE - 18 July 2023: It has been reported that HMT is re-considering the timing of bringing BNPL into the regulatory perimeter, given concerns that stricter rules could prompt some BNPL lenders to leave the market, thereby impacting consumers during the cost of living crisis. However, even if regulation is delayed, we still expect it to be implemented at some point and therefore all key points in the below article remain relevant.  


The Treasury’s consultation of draft legislation closed in April 2023. This is the most recent step in a long process which started in 2021 when the Woolard Review recommended BNPL should be brought within the FCA’s regulatory perimeter. Following a subsequent consultation and response in 2022 and the latest HMT consultation, legislation will be brought before Parliament to bring BNPL within the FCA’s remit. The FCA will then consult on the further tailoring of rules specifically for the BNPL sector.

Final rules are not expected until late 2024, but BNPL lenders have a significant amount of preparation ahead to ensure they're ready to operate in a compliant manner.

Creditworthiness assessments to be introduced

Lenders will need to undertake affordability checks. The FCA will consult on what form credit worthiness assessments will take, to ensure proportionality for the BNPL sector. While many BNPL lenders already undertake credit checks they'll need to think carefully how to integrate affordability assessments that will meet regulatory expectations, given that speed and ease of application at checkout has been key for the sector, enabling rapid growth.

BNPL lenders have argued in UK Finance’s response to HMT’s consultation that introducing creditworthiness assessments "will not improve consumer outcomes, consumers do not read agreements so this proposal will not improve outcomes/understanding, and some providers believe ... this approach incentivises switching to a running account model with a higher opening credit limit for consumers".

Klarna and Zilch have also expressed concerns that the proposed regulations may push consumers towards higher risk forms of credit – or increase the risk of ‘loan stacking’ where consumers can borrow to pay off BNPL debts. We await HMT’s response to this consultation, expected later in 2023.

Ads and promotions to fall under financial promotions regime

Financial promotions will have to be approved by an authorised person. Rather than a merchant undertaking this, HMT expect BNPL lenders to provide merchants with pre-approved materials.

In the British Retail Consortium's (BRC) response to HMT’s consultation, the BRC raised concerns that a ‘one size fits all’ approach from lenders might result in retailers being forced to use marketing material unsuitable for their customers, but given no choice as the BNPL payment option is popular. To ensure this doesn't happen, and to comply with regulatory expectations, including the Consumer Duty, lenders will need to make sure that all financial promotions are appropriate. This includes those in real-time communications, such as chat bots and instant messaging.

BNPL lenders need to be aware of what a sizeable task this is, in terms of the arrangements, systems and controls that will need to be put in place, including from a governance perspective.

Right to complain to the Financial Ombudsman Service

HMT has confirmed that BNPL consumers will be able to complain to the Financial Ombudsman Service (FOS). This is potentially significant as a high number of customer complaints – and their associated redress compensation claims – has been a major factor in the demise of other firms in the consumer credit sector.

Typically, each complaint made to the FOS generates a case fee of £750 payable by the lender, regardless of the outcome. Despite concerns from the industry raised during the consultation process, HMT has stated it is for the FOS to decide case fees, although it has committed to raise this issue with the FOS.

Requirement to report to credit reference agencies

BNPL lenders will have to undertake ‘clear, consistent and timely’ reporting to the credit reference agencies (CRAs), to enable a customers’ BNPL loans to be visible on their credit file.

Consumers are increasingly savvy about their credit file, but with this comes increased expectations about the quality of reporting by lenders. Poor reporting or data quality from lenders can affect the ability for customers to obtain credit or cheaper credit, and this can lead to complaints. Historically, consumer complaints about credit reports have been one of the top complaint drivers at the FOS. Recognising that some BNPL firms already report to the CRAs, it's important that BNPL lenders have adequate systems in place to collate and extract accurate data which they can report on a timely basis.

Treatment of customers in financial difficulty

BNPL lenders will be subject to rules within the Consumer Credit Act 1974 (CCA) on treatment of customers in financial difficulty. Many BNPL firms already have processes in place to identify and support customers in financial difficulty, but will now need to ensure that these are consistent with potentially more stringent regulatory requirements.

To comply with the CCA, lenders will have to ensure that any action they take towards the creditor doesn't constitute an ‘unfair relationship’, which is detrimental to the consumer, and can risk agreements being deemed unenforceable on account of fairness at a later date. ‘Unfair relationship’ claims continue to have a wide potential application in the context of consumer claims.

Lenders must also ensure that their procedures to identify financial difficulty, and to monitor this on an ongoing basis, meet all regulatory expectations.

Complying with the Consumer Duty

BNPL lenders will need to comply with the new Consumer Duty rules. This raises the regulatory bar even further for BNPL lenders as they need to ensure ‘good outcomes’ for their customers.

They are also required to make sure that BNPL products are fully understood by customers, meet their needs, provide fair value and help customers achieve their financial objectives.

How will regulation affect BNPL business models?

The need to comply with the CCA could have a significant impact on customer journeys and point-of-sale processes. While many firms already undertake affordability assessments, making sure these are of a standard that complies with the CCA could bring extra friction at point of use.

Undertaking more rigorous affordability assessments may put customers off taking out a BNPL loan, or reduce spending. Certain cohorts of borrowers might also find it harder to access BNPL products, especially when coupled with the greater visibility of BNPL loans from alternative providers due to the requirement to report to the credit reference agencies.

As competition increases and the sector matures with regulation, firms that incorporate late-payment fees into their business model may experience a change in their revenue mix between merchant fees and consumer-driven late fees. This comes at the same time as firms are withstanding cost-cutting exercises amid a fall in valuations.

What should BNPL firms do now?

Many BNPL firms have already started preparing for regulation but the sector will still need to navigate significant change which will take time and resource.

BNPL lenders will need to apply to a temporary permissions regime (TPR). This will allow firms to continue to operate ahead of authorisation by the FCA if they register within a window that will be set by the FCA. During the TPR, the FCA will still be able to supervise firms and take enforcement action against them, so management must be prepared for this.

Firms should seek support on the new regulatory requirements to ensure compliance once they are under the remit of the FCA – including advice on appropriate governance structures.

Given the likely impact, firms should also consider their financial resilience. Financial modelling with scenario testing can provide greater visibility of areas of potential stress or vulnerability. As with life, forewarned is forearmed.

For more information and advice, contact Jarred Erceg.

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