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Welcome for government BNPL regulation tempered by warnings on costs and friction

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There’s been a broad welcome for the government’s proposals to strengthen the regulation of buy-now-pay-later (BNPL) agreements in the UK by requiring lenders to ensure borrowing is affordable. However, there are also suggestions that the new regulations will mean both higher friction and costs.

Under government plans, lenders will have to ensure that loans are affordable by carrying out affordability checks. The government will also amend financial promotion rules to ensure BNPL advertisements are fair, clear and do not mislead customers. Other forms of short-term credit, such as finance for dental treatment or for buying furniture in instalments, will also be covered by the change in rules. 

John Glen, economic secretary to the Treasury, says: “Buy-now-pay-later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place. By holding buy-now-pay-later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”

The new rules will apply to businesses that work with third-party lenders to provide credit, and the government is also asking stakeholders for feedback on whether they should apply to online merchants who offer credit to buy their own products. 

‘Proportionate model of regulation’

Gary Rohloff, co-founder and managing director of BNPL payments platform Laybuy, says: “We have always been in favour of a proportionate model of regulation, one that reflects the low risk of BNPL, supports small ecommerce businesses and sets high standards across the industry.

“Since we started Laybuy, we have always set out to be the most responsible BNPL lender. That means working with credit reference agencies and conducting creditworthiness checks on all our customers. It’s a real endorsement of our model that the Government agrees that this should be taken forward across the industry.

“Naturally, we need to have a look at the consultation response in full, but we’re supportive of the Government’s approach and we look forward to working closely with the FCA on the next steps.”

Commenting, Adam Kirkby, head of sales at BNPL provider etika, says: “etika welcomes this announcement from the government today. As an organisation we’ve always believed in providing customers with ethical, fair, affordable lending options, which is why we have always operated under existing FCA regulations.”

Kirby says the new rules are a “wake-up call for the BNPL market” and an “opportunity to build better standards and drive safer growth for this innovative market that retailers and customers have come to rely on.”

Payments platform Adyen questioned 2,000 people and found that 58% of the population believe that buy now, pay later services need better regulation, while 39% of the population has used a BNPL service before, and 20% have done so in the past year. More than a third (37%) say that BNPL services allow them to buy things they wouldn’t normally be able to by breaking the cost into instalments, and 26% believe that BNPL services help them manage their finances.

Colin Neil, UK managing director of Adyen, says “Choice and flexibility are vital for shoppers when it comes to paying for goods and services. And our research shows consumers are more likely to shop with retailers that offer a choice of payment options. Buy now, pay later services are important because they offer consumers another form of choice, and according to our research, some even say it helps them better manage their finances. But as with any financial product, there needs to be the right protection in place for consumers and retailers.”

‘Increase costs and create friction’

However, Rosanna Bryant, financial regulation partner at Addleshaw Goddard, says: “The new requirements will increase costs for providers and will create friction in the customer journey. This may lead to a contraction of the market where certain firms do not want to proceed to be authorised given the costs of doing so and/or consumers are unable to access BNPL due to the increase in affordability assessment. The overall objective of the regulation is to be welcomed – it is widely recognised that the market was allowing certain borrowers to access credit and build up debt which they are not able to repay and did not understand. However, the FCA’s approach to largely adapt existing consumer protection regulation for BNPL does not adequately recognise the difference in the market and the nature of the products nor take advantage of an opportunity to regulate this type of credit in a much more flexible and dynamic way.

“I’d expect the big players will remain and the BNPL market will continue to expand as more customer journeys in retail move online. However the increased costs are likely to be borne by retailers and ultimately may be passed on to the end consumer.”

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