Contained within the Consumer Credit Act of 1974 is an exemption that allows for the “delayed payment of goods and services”, provided that the delay is time-limited and does not involve charging interest. It was included to allow people to pay for goods and services at a later date without the business needing to comply with additional consumer credit regulations – think about paying for window cleaning, for example. If you aren’t in when the windows are cleaned, you might pay a few days later.

To date, Buy Now Pay Later (‘BNPL’) has escaped regulation by claiming an exemption from the Consumer Credit Act under this provision.  But, in 2021, the growing evidence of considerable consumer detriment arising from the use of BNPL, prompted Government to commit to bringing it within the FCA’s remit, and to providing “balanced and proportionate” regulations.  

The causes for concern are well known, and were summarised by the FCA’s Woolard Review. Worried by the lack of affordability checks and inconsistent treatment of customers in financial difficulty, the Review recommended that BNPL be regulated as a credit product.

But the road to regulation has been long and has now taken what appears to be a turn back.  It took HM Treasury two years to publish draft legislation for consultation, and last month there were reports that the Treasury was “poised to shelve [its] crackdown” on the sector. The reason given was “Whitehall concerns” that regulation could curb the availability of BNPL, “with ministers [worried] about the impact of such a move during Britain's cost-of-living crisis.”  

Whilst there were further reports last week, indicating no final decision has yet been made, the prevarication tells us a lot about Government thinking in the cost-of-living crisis: to tackle high costs and inadequate incomes it considers more private credit use as a potential alternative to genuine financial support.

BNPL is a credit product

Few would deny that BNPL products are credit products. At the point of sale, people use BNPL to spread payments for goods, over a specific period. They are credit cards version 2.0. Just like credit cards, there is an interest-free period, and if repayment isn’t made in full within that period, then charges apply.  If people have problems repaying, things can get very expensive very quickly. This is already happening.  

The similarities with credit cards don’t end there.  Just like credit card providers, BNPL products make money even without charging interest.  The retailers provide a kick back on transactions, because offering goods and services on a BNPL basis encourages people to consume more than they would otherwise.  

The only real difference with credit cards is that the interest/charge-free –period is typically longer.  This might only be possible because the cost of operation is lower, and its lack of regulation is therefore providing it with a competitive advantage.

But the need to regulate this market is clear. Multiple market studies have shown the detrimental effects of falling behind on BNPL. Citizens Advice has previously shown that outcomes can be poor. 20% of consumers have regretted something they bought online using BNPL services, and 30% have ended up spending more than they expected. More than two in five Buy Now Pay Later (BNPL) customers borrowed money to make repayments, and the types of borrowing included overdrafts, borrowing from friends and family, loans and payday loans. The most popular, however, was credit cards (26%) which perhaps explains why these aren’t too worried about the competitive advantage that BNPL has over their own, regulated, business model.

When Christopher Woolard was recently asked about the detriment being caused by BNPL, he responded that “everyone agreed this was urgent back in early 2021. The only thing that has changed since is that the market has doubled in size.”

What’s also changed is the depth of the cost of living crisis and the role of debt in exacerbating that. JRF’s most recent cost of living tracker survey shows that 5.7 million households had around £14.2 billion in unsecured debt (personal loans, credit cards, overdraft facilities, payday lenders and licensed doorstep loans) as of May 2023, around £2,500 on average per household. 7 million households cut back spending on essentials since 2022, including food and heat. These households fall behind on payments by an average £1,600. 1.3 million households use credit to pay for essentials, and 2 million households owe money to high interest lenders. These figures don’t include the 27% of low income people who have a BNPL/hire purchase loan. The average amount owed is £565.

It is concerning for Ministers to consider pausing the regulation of BNPL. Doing so, would indicate a preference for credit extension to more sustainable solutions such as increasing pay or controlling the spiralling cost of essentials. And, such a move would accept that people will fall further into debt as a result. The reported position of the Treasury acknowledges that if BNPL became a regulated credit product there would be people unable to access it due to their inability to pass any reasonable affordability assessment.  

The Treasury knows economic activity is slowing as interest rates hit spending. It’s likely this will be the case if interest rates rise again. In part HMT’s reason for contemplating shelving regulation appears to be because it would impact negatively on consumption. There’s also an apparent fear, although unevidenced, that regulation would lead to market exit. In fact the largest BNPL provider Klarna has, in other jurisdictions (primarily Sweden - it’s largest market), called for tighter rules. Does this make Klarna the ‘good guys’?  Not necessarily:, having achieved considerable market share they now perhaps want to use regulation to create a barrier to market entry to shield them from new competitors.  

There is, however, evidence that BNPL increases conspicuous consumption and encourages spending that wouldn’t have happened without it. A major worry in the context of a deepening cost of living crisis is that the government accepts higher rates of over-indebtedness as the price to pay for staving off recession.

Regulating BNPL in other jurisdictions

Like most other jurisdictions, BNPL initially looked different to other credit products and therefore entered the market unregulated. But, in June last year, the Council of the European Union agreed to revise the Consumer Credit Directive to “modernise and enhance protection at the European level by broadening the scope of products under regulation, including BNPL."

Proposed revisions include clarifications on the use of creditworthiness assessments; the definition of a maximum time limit to exercise the right of withdrawal, and clarifications on penalties that providers can apply. All of this serves to give certainty and clarification to people using BNPL. This provides sound correction to the ambiguity of BNPL products now. As Citizens Advice has pointed out, many people currently enter into BNPL agreements without fully understanding what it is. Introducing uniform rules on BNPL would add clarity at the outset for what people can expect using these products. It also applies reasonable rules to stop people accessing a product they may not be able to afford.

Other credit providers bear higher operating costs because of their regulation.  But these higher costs for lenders reduce costs for wider society.  The negative impacts of over-indebtedness for households, communities, and our public services are well documented. Reducing so-called 'red tape' might be beneficial to firms, but can come at greater cost for public services. Given the competitive advantage that a failure to regulate has created - and indeed which providing a so-called 'proportionate' or 'lighter touch' framework for BNPL would embed - it is strange that the Competition and Markets Authority has not been more involved in discussion of BNPL regulation.  It is also clear, given the growing body of evidence concerning problems with this product, that UK divergence from the approaches being taken by the EU and other jurisdictions would very likely lead to worse outcomes for British households.

Aug 15, 2023

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