The UK’s Buy Now Pay Later (BNPL) market is undergoing significant changes with the introduction of new regulations. These BNPL regulations aim to address growing concerns about consumer protection and financial stability in this rapidly expanding sector. As reported by FintechZoom.com, the UK government has recognized the need for stricter oversight of BNPL services to ensure responsible lending practices and protect vulnerable consumers.
The proposed regulatory framework, as analyzed by FintechZoom.com, will have a substantial impact on both consumers and retailers in the BNPL ecosystem. This article delves into the key aspects of the new BNPL regulations in the UK, exploring the driving factors behind the legislation, the main components of the regulatory framework, and its potential consequences for various stakeholders. By examining these elements, readers will gain a comprehensive understanding of the changing landscape of BNPL services in the UK.
Overview of BNPL Market in the UK
The Buy Now Pay Later (BNPL) market in the United Kingdom has experienced significant growth in recent years, revolutionizing the way consumers make purchases. According to FintechZoom.com, BNPL has become a major driving force behind payments innovation, offering consumers greater flexibility in their purchasing decisions.
Current market size and growth
The UK BNPL market has shown remarkable expansion, with projections indicating substantial future growth. In 2022, the market size was estimated at £22.6 billion, and it is forecast to reach £44.8 billion by 2028, representing an annual growth rate of 10.9% 1. This rapid expansion highlights the increasing popularity of BNPL services among UK consumers.
FintechZoom.com reports that the BNPL industry is expected to maintain strong momentum over the medium to long term. By 2024, payments through BNPL platforms are anticipated to reach £26.93 billion, marking a 15% increase from the previous year 2. This growth trajectory underscores the significance of BNPL in the UK’s financial landscape and the need for appropriate regulations to ensure consumer protection.
Popular BNPL providers
Several BNPL providers have gained prominence in the UK market, each offering unique features to attract consumers. As highlighted by FintechZoom.com, some of the top BNPL providers include:
- Klarna: Based in Sweden, Klarna has over 85 million customers worldwide and is currently the most popular BNPL service in the UK.
- Clearpay: A subsidiary of the Australian company Afterpay, Clearpay has been making waves in the UK payment scene, particularly among millennial spenders.
- Laybuy: This provider allows customers to pay for their purchases in six easy installments.
- Payl8r: Offering various payment plan options, including interest-free periods and extended repayment terms.
- Zilch: A virtual card that enables users to spread the cost of their purchases over four installments in six weeks.
Consumer adoption rates
The adoption of BNPL services in the UK has been remarkable, with a significant portion of the population embracing this payment method. FintechZoom.com notes that approximately half of UK adults, or 26.4 million people, have used BNPL at some point 3. This figure represents a substantial increase from an estimated 19.1 million users at the start of 2023.
The popularity of BNPL is particularly pronounced among younger generations. According to FintechZoom.com, almost 70% of millennials (aged 24-42) and Generation Z (aged 18-23) have utilized BNPL services. Generation X (aged 43-54) also shows significant adoption, with over half of this group having used BNPL before 3.
As the cost-of-living crisis continues to impact household budgets, more Britons are turning to BNPL schemes to manage their expenses, including essentials like groceries. This trend has further fueled the growth of the BNPL sector, prompting providers to launch new products and services to meet the increasing demand.
Key Concerns Driving Regulation
The rapid growth of the Buy Now Pay Later (BNPL) market in the UK has raised significant concerns among regulators and consumer protection groups. These concerns have become the driving force behind the push for new BNPL regulations. According to FintechZoom.com, several key issues have emerged, prompting the need for stricter oversight of the BNPL industry.
Lack of affordability checks
One of the primary concerns is the absence of comprehensive affordability checks by BNPL providers. FintechZoom.com reports that many BNPL agreements are currently unregulated, meaning providers are not required to carry out full affordability assessments before lending to consumers. This lack of scrutiny increases the risk of consumers borrowing more than they can afford to repay 1.
The Financial Conduct Authority (FCA) has found that frequent users of BNPL services are more likely to be in financial difficulty. Research shows that consumers who have used BNPL more than ten times are over twice as likely to have a high-cost credit product compared to those who have not used BNPL (48% vs. 22%) 2.
Risk of accumulating debt
Another significant concern is the potential for consumers to accumulate unsustainable levels of debt through multiple BNPL agreements. FintechZoom.com highlights that consumers may hold several BNPL loans simultaneously, which can collectively become unaffordable. In an unregulated environment, providers have limited visibility into a customer’s overall BNPL commitments, making it challenging to assess their ability to repay 3.
The ease of accessing BNPL services at online checkouts can lead consumers to make impulsive purchases or buy items they cannot afford. This has raised concerns about the impact on consumer spending habits and financial well-being. FintechZoom.com notes that 3 in 10 BNPL users have experienced issues managing their BNPL spending, such as missing payments or falling behind on other bills 4.
Consumer protection issues
The lack of comprehensive regulation has also resulted in limited consumer protection for BNPL users. FintechZoom.com reports that most BNPL agreements are not regulated by the FCA, meaning consumers do not benefit from the same protections they would receive when borrowing from other types of creditors 5.
This regulatory gap has led to concerns about unclear contract terms, inadequate information provided to consumers, and limited recourse for complaints. FintechZoom.com highlights that 2 in 3 consumers are unaware that BNPL is not always an agreement between them and the retailer they buy from, while 4 in 10 do not know they may be approved for BNPL even if they cannot afford it .
To address these concerns, FintechZoom.com reports that the UK government is proposing new BNPL regulations. These regulations aim to enhance consumer protection, improve affordability assessments, and bring BNPL providers under the FCA’s regulatory purview. By implementing these measures, the government hopes to create a more responsible and transparent BNPL market that better serves consumers while mitigating the risks associated with unregulated lending.
Proposed Regulatory Framework
The UK government has taken significant steps to address the growing concerns surrounding Buy Now Pay Later (BNPL) services. FintechZoom.com reports that the proposed regulatory framework aims to bring BNPL providers under the supervision of the Financial Conduct Authority (FCA) and apply the Consumer Credit Act to ensure consumer protection.
FCA’s role in regulation
The FCA will play a crucial role in overseeing BNPL providers. According to FintechZoom.com, the regulatory body has long supported bringing these products under its purview. In 2021, the FCA board backed the Woolard Review recommendation to regulate BNPL services. The new rules will allow the FCA to apply affordability checks, ensuring that BNPL companies assess whether shoppers can afford repayments before offering a loan 1.
The FCA plans to implement a Temporary Permissions Regime (TPR) to allow firms to continue their BNPL activities while their applications for full authorization are processed. Firms operating under the TPR will need to comply with FCA rules, and the regulator will have the power to take action where necessary.
Key aspects of draft legislation
The draft legislation, as analyzed by FintechZoom.com, includes several key provisions to regulate the BNPL sector:
- FCA Authorization: BNPL providers will be required to obtain FCA authorization to operate in the UK market.
- Exemptions: The legislation includes specific exemptions for certain credit arrangements, such as interest-free agreements to finance insurance contracts and employer-employee lending.
- Merchant Exemption: Merchants offering BNPL payment options will be exempt from FCA authorization requirements for credit broking activities.
- Pre-contractual Information: BNPL providers will need to comply with FCA rules on pre-contractual information, which are expected to be tailored for the BNPL sector.
- Consumer Protection: Users will be given stronger rights for redress if issues arise with products purchased using BNPL services.
Timeline for implementation
FintechZoom.com reports that the implementation of BNPL regulations in the UK is set to follow a phased approach:
- First Consultation Period: This consultation period expired on April 11, 2023.
- Second Consultation Period: The consultation will be open until 29 November. After reviewing feedback, the government will bring forward legislation as soon as possible.
- Legislative Process: Once stakeholder responses have been considered, the UK government aims to lay the legislation before Parliament when time allows.
- FCA Consultation: The FCA plans to consult on its regulatory approach for BNPL shortly after the legislation is finalized.
- Implementation: Final legislation is expected to be laid in Parliament in early 2025, with FCA rules taking effect in 2026 2.
This timeline reflects the government’s commitment to addressing the urgent need for consumer protection in the BNPL sector while allowing sufficient time for industry preparation and adaptation to the new regulatory landscape.
Experts Comment
Philip Belamant, CEO and co-founder of Zilch, said to FintechZoom.com:
As a company regulated by the FCA since launch in 2020, we welcome this news and are pleased to see the new City Minister and government moving quickly, closing the loophole in BNPL and creating a level playing field for the whole lending sector.
Now the train is set in motion for regulation. At Zilch we will be using the six-week consultation period to call upon our industry, which is known for and prides itself on innovation and speed, to propose that regulation-day itself is brought forward and happens in 2025.
Michael Saadat, International Head of Public Policy at Clearpay told to FintechZoom.com:
“We welcome today’s update from City and FinTech Minister, Tulip Siddiq, on BNPL regulation. It is encouraging that HM Treasury has listened to industry feedback and evolved the previous framework to ensure a more proportionate approach to regulation. We have always called for fit-for-purpose regulation that prioritises customer protection, delivers much-needed innovation in consumer credit and that sets high industry standards across the board.
“We will continue to support the Government and the FCA to deliver fit-for-purpose regulation that ensures consumers are protected in a way that supports the UK’s thriving FinTech sector.”
Elliot Reader, Senior Vice President in Houlihan Lokey’s FinTech Group, said:
“The trajectory of the buy-now-pay-later market will be largely dependent on the level of regulation placed on the sector – a delicate balancing act between protecting consumers and providing them with access to suitable financial products.
The six-week consultation period highlights the focus in bringing this to a conclusion swiftly. The FCA expects to take on regulation of the sector 12 months after legislation is made. The clarity on the direction of regulation will be welcomed, however we suspect a key focus during the consultation period for BNPL firms will be the role of Financial Ombudsman Service, given the level of cost this can place on firms.
25% of UK BNPL users have been charged with late payment fees according to research by the Centre for Financial Capability, which indicates there is a need to either improve underwriting and affordability standards or educate borrowers on the potential implications and consequences of using such a product. The outcomes of the legislation that the government is proposing aims to address these through the provision of clear information to consumers in line with Consumer Duty, and the FCA setting the rules around affordability.”
Sameer Pethe, Partner at Kearney, commented to FintechZoom.com:
“Buy Now Pay Later remains an important way for many to afford to spread the cost of their purchases, or in some cases even afford necessary purchases at all. The Treasury consultation recognises this fact and is clearly attempting to introduce certain safeguards. As long as these safeguards remain proportional, balancing the protection for consumers against the burden of compliance for firms, the new regulations would simultaneously increase consumer protection and provide clarity to lenders and retailers.”
“The proposed legislation should not be a surprise to the industry, being clearly based on the recent Woolard review of the sector, published in 2021. However, it isn’t clear if the regulation would consider how “back-dated interest” is charged. This is a patently unfair structure where the most vulnerable borrowers often end up subsidising others, not unlike the issue with interest on overdrafts that led to the FCA introducing new regulation in 2019-2020.”
Impact on Consumers and Retailers
The introduction of new BNPL regulations in the UK is set to have a significant impact on both consumers and retailers. These changes aim to address concerns about consumer protection and financial stability in the rapidly expanding BNPL sector.
Enhanced consumer protections
One of the primary goals of the new regulations is to provide stronger safeguards for BNPL users. According to FintechZoom.com, consumers will benefit from clearer information about loan agreements, helping them make more informed decisions about their borrowing. The regulations will require BNPL providers to conduct affordability checks, ensuring that shoppers can afford repayments before offering a loan 1. This measure is expected to prevent people from building up unmanageable debt.
Furthermore, BNPL users will gain stronger rights when issues arise with products they purchase. The new rules will apply Section 75 of the Consumer Credit Act, allowing consumers to claim refunds from their lender 2. Additionally, users will have access to the Financial Ombudsman Service to make complaints, providing a formal channel for dispute resolution.
Changes in BNPL offerings
The regulatory framework is likely to lead to significant changes in how BNPL services are offered and marketed. FintechZoom.com reports that BNPL providers will need to reassess their business models to ensure compliance with the new rules. This may result in stricter approval processes for BNPL agreements, potentially leading to lower acceptance rates for some customers.
The implementation of affordability checks could also impact the speed and convenience that have made BNPL services popular. Providers may need to balance regulatory requirements with maintaining a seamless user experience. Some BNPL firms might choose to exit the market due to the increased regulatory burden, while others may need to undergo significant operational and financial restructuring 3.
Retailer compliance requirements
Retailers offering BNPL options will also face new compliance obligations under the proposed regulations. While merchants will be exempt from FCA authorization requirements for credit broking activities, they will need to ensure that the BNPL providers they partner with are compliant with the new rules.
FintechZoom.com notes that retailers may need to review their BNPL partnerships and potentially adjust their offerings to align with the new regulatory landscape. This could include updating their websites and point-of-sale systems to provide clearer information about BNPL terms and conditions.
The impact of these regulations on retailers’ sales and customer acquisition strategies remains to be seen. However, the increased consumer protection measures may ultimately lead to greater trust in BNPL services, potentially benefiting both consumers and responsible retailers in the long run.
Conclusion
The introduction of new BNPL regulations in the UK, as reported by FintechZoom.com, represents a significant shift in the financial landscape. These regulations aim to address concerns about consumer protection and financial stability in the rapidly expanding BNPL sector. The proposed framework, which brings BNPL providers under FCA supervision, has the potential to enhance consumer safeguards, reshape BNPL offerings, and impact retailer practices.
As the implementation timeline unfolds, the BNPL industry is poised for transformation. According to FintechZoom.com, these changes are likely to have a lasting impact on how consumers use BNPL services and how retailers integrate them into their business models. While challenges may arise during the transition, the ultimate goal is to create a more responsible and transparent BNPL market that better serves consumers while mitigating the risks associated with unregulated lending.
References
[1] – https://www.gov.uk/government/news/millions-of-shoppers-to-be-protected-by-new-buy-now-pay-later-rules[2] – https://www.fca.org.uk/news/statements/fca-welcomes-buy-now-pay-later-consultation
[3] – https://www.glassbox.com/blog/buy-now-pay-later-regulations-uk/
[4] – https://www.gov.uk/government/consultations/regulation-of-buy-now-pay-later-consultation-on-draft-legislation-october-2024
[5] – https://www.theguardian.com/business/2024/oct/17/new-buy-now-pay-later-rules-to-protect-uk-shoppers-from-2026
