The UK government is set to introduce regulations on Buy Now Pay Later (BNPL) products, aiming to safeguard consumers and promote responsible lending practices.
A consultation on the government's draft legislation began on October 17, 2024, and will remain open until November 29, 2024, with legislation expected to follow based on the collected feedback.
These services, which have surged in popularity, allow consumers to spread out payments, often with no interest. However, concerns have been mounting over the risks they pose to consumers, particularly regarding affordability and financial health.
Addressing consumer risks and benefits
While BNPL services provide greater flexibility for consumers and help retailers boost sales, they also come with notable risks.
A 2023 study by the Centre for Financial Capability revealed that 25% of UK users have faced late payment fees, highlighting the need for stricter regulation to protect users.
Elliot Reader, Senior Vice President at Houlihan Lokey’s FinTech Group, noted the fine balance regulators must strike: "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."
FCA's planned regulatory approach
The Financial Conduct Authority (FCA) plans to implement a regulatory framework for BNPL shortly after the government's legislation is finalised, which is expected to be completed in 2025.
The regulatory regime will enforce affordability checks, clear disclosures, and protections under the Consumer Duty, aligning BNPL with existing credit rules. BNPL providers will also need to apply for authorisation, ensuring that the firms operate under FCA supervision. A temporary permissions regime will allow firms to continue their operations during the transition period, avoiding disruption to the market.
Impact on retail and financial services
For retailers, these changes may lead to adjustments in how they offer BNPL services. Firms will need to ensure compliance with the new rules, particularly in the areas of creditworthiness and transparency.
As Reader emphasised, the focus will likely shift to the role of the Financial Ombudsman Service and the costs associated with addressing consumer complaints.
Nonetheless, these regulations aim to foster innovation while safeguarding consumers, ensuring BNPL remains a viable payment solution in the retail sector.
The consultation period will conclude on November 29, 2024, with final legislation expected next year, setting the stage for a new regulatory era for BNPL in the UK.
