The government has agreed to permit the regulation of bring buy now, pay later (BNPL) services following the publication of an FCA review on the unsecured credit market.

Christopher Woolard, chair of the review, said that the legal change was urgently needed to give the FCA a “proper handle” on BNPL at a digital press conference on Tuesday.

The Woolard Review sets out how regulation can better support a healthy market for unsecured lending, taking into account the impact of the coronavirus pandemic, changing business models and new developments in unregulated BNPL unsecured lending.

The use of BNPL services nearly quadrupled in 2020, and is now worth £2.7 billion, with five million people using these products since the beginning of the coronavirus pandemic.

The review warns that unregulated BNPL products come with “significant potential for consumer harm,” with more than one in ten customers of a major bank using the payment service already in arrears.

The chair and former interim FCA chief exec said that with many retailers offering five BNPL options at checkout, it’s easy for a customer to rack up a £1000 bill with little effort, warning that these purchases are not visible to other lenders or BNPL providers.

Across BNPL firms there have been varied approaches to dealing with things like late payment.

But the review chair said that because of a lack of credit checking these companies are “effectively flying blind.”

He added that he hoped the legislation would come into force in a matter of months rather than years, warning that with the significant scale of growth there is an “urgent need to ensure [the] market [has] some boundaries around it” for both customers and the industry.

In the meantime, he said, retailers could be putting in place proper credit checks and joining credit agencies.

He also said that a number of authorities, including the FCA and the CMA, have “powers in the margins” which might help address the issue in the interim.

John Glen, economic secretary to the treasury, commented on the government’s decision to regulate the payment service: “Buy-now-pay-later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular."

He added: “By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.”

What powers will the FCA have?

Once new regulation has been introduced, BNPL companies will be on the same footing as any other traditional lender.

That means the FCA will have the power to dish out fines and deal with senior management.

When the legislation is brought forward, there will likely be an enforcement of proper affordability checks before credit is given, as well as a scheme on how lenders treat customers that do get into financial trouble.

The regulation will also mean that if a customer needs to make a complaint they can go to the Financial Ombudsman Service, which isn’t currently an option for consumers.

BNPL market reaction

Firms across the BNPL market, including Klarna, have said they are open to the regulation.
Woolard said that during the review, firms generally showed a good level of cooperation.

However, he said that companies might want something different to standard regulation for lenders.

But he said that the retailer’s role must be considered, adding that special regimes would mean “kicking the can down the road” for years, adding that standard legislation is what’s really needed.

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