On 21 October 2021, the Treasury published a consultation paper setting out policy options for the regulation of the BNPL sector which will not close until January 2022. This will be followed by a separate consultation by the FCA. Back in February 2021, the Woolard review concluded that the government needed to take “swift action to bring these products into regulation” and the Treasury minister John Glen stated he intended to take forward the necessary legislation “as a matter of priority”. But we still do not have a clear picture of what any final rules will be. The sector is in limbo – regulation is coming, but we cannot yet confirm what it will look like.
The focus in the media has been on the continued risk posed to the consumer by the lack of regulation; primarily that there is confusion about where online payment ends and credit begins, whether the risks of missed payments are clearly explained, and concerns around whether affordability checks are in place, leading to inappropriate lending to vulnerable customers.
These are valid issues. However, I would like to highlight the risk posed by this current regulatory limbo to the BNPL providers themselves.
In a previous article, my colleague Chris Laverty and I highlighted what we believed regulation might look like for the BNPL sector, based on the FCA’s approach in other areas of consumer credit.
The Treasury consultation has indicated that any regulation of BNPL would include the application of the FCA’s current rules on creditworthiness to BNPL agreements. Firms will have to undertake affordability checks, with the onus being on the firm to ensure these are as accurate and robust as possible. These checks should be granular enough to pick up all income and expenditure items of the borrower, including debts with other lenders. Checks will also need to monitor affordability on an ongoing basis for repeat customers – the FCA have highlighted poor re-lending practices in other areas of consumer credit. Importantly, firms will need to be able to identify vulnerable customers. These customers should then receive a more appropriate customer journey, with associated processes in place to deliver that.
Crucially, once under FCA regulation, BNPL customers will be able to refer complaints to the Financial Ombudsman Service (FOS), particularly where they took on debt that they believe was unaffordable. The role that complaints management firms (CMCs) can play in increasing the volume of claims against a firm is well known.
BNPL firms may not know is that it is possible to be liable for redress claims for loans made now, even before regulation has been implemented; therefore facing retrospective remediation.
This happened to firms in the high-cost short term (HCST) credit sector. The FCA started regulating this sector in 2014, but the FOS imposed the strict consumer protection standards, introduced in 2014, to loans that were made prior to that date.
This stance was confirmed by the High Court judgement in the Kerrigan vs Elevate case in August 2020. The Court upheld a complaint against the payday lender Elevate Credit International (in administration), which traded as Sunny. The judgement ruled in favour of an ‘unfair relationship’ claim, which was viewed to exist where inadequate credit assessments were undertaken when the claimant made repeated loan applications – prior to regulations being implemented.
It is worth noting that ‘unfair relationship’ claims have a wide potential application, which is especially true in the case of historic rule breaches, as there is a generous limitation period allowed for such claims – typically six years from when the fact of any unfair relationship has been discovered, or could have been ‘with reasonable diligence’.
This leaves the possibility that BNPL firms could be made liable for redress claims for irresponsible lending or inadequate affordability checks now, for loans issued before regulation has even been introduced.
The BNPL market is on an upward trajectory with several international deals this year; Payments company Square bought Australian BNPL firm Afterpay, Affirm has announced a partnership with Amazon and PayPal has bought Tokyo-based group Paidy, to name a few. A recent survey by Which? estimates that BNPL services have been used by a third of UK consumers.
Management’s time will no doubt be taken up by managing this growth. But implementing the right processes during this growth phase will be beneficial in the long run. Klarna has recently announced it will introduce new wording to make it clear to customers they are being offered credit with penalties for missed payments, stronger credit checks and removing late fees from its longer-term repayment plans.
The rest of the sector may benefit from taking similar steps. BNPL firms should be aware of the risk of retrospective remediation and consider how best to mitigate this by making adequate disclosures to consumers and implementing robust systems and processes for affordability assessments now.
For more information, contact Jarred Erceg.