The government has outlined its plan to bolster buy now, pay later (BNPL) regulation in a move that will force providers to conduct credit checks and register with the Financial Conduct Authority.
The proposal, published on Monday, follows the closure of a consultation from the Treasury that looked into concerns that the largely unregulated BNPL sector was sending consumers into debt.
If brought into effect, firms offering the service will have to conduct credit checks to ensure customers can afford to take on the debt, as is the case for other loans.
Misleading promotions and advertisements are also set to be tackled as part of the new consumer protection policies, while BNPL companies would need to receive FCA approval before they can operate in the UK.
As of November 2021, more than 17 million UK consumers had used BNPL services, which splits payments into interest-free instalments if repayments are made on time.
“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,” said economic secretary to the Treasury John Glen.
“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.”
Those within the BNPL industry have expected stronger regulation to be coming for a while, with some firms, like Klarna, taking pre-emptive measures by adopting consumer protection policies.
Gary Rohloff, co-founder and managing director of New Zealand headquartered BNPL company Laybuy, said: “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.”
Rohloff added that Laybuy has already been conducting creditworthiness checks on all its customers.
Before the government announcement, Peter Keenan, co-founder and CEO of payment orchestration platform and BNPL aggregator company APEXX, told UKTN that “it is absolutely clear that regulation is needed in the buy now pay later ecosystem”.
Keenan explained how despite being a credit product, BNPL has so far not faced the same regulatory scrutiny that the Consumer Credit Act brought on loan providers.
“All other types of interest-bearing consumer credit, have various reporting, minimum standards that you have to adhere to,” said Keenan.
Keenan, like many within the BNPL industry, tempered his approval for regulatory oversight with caution for some “areas of potential concern”.
One of those is over how customers will react in the face of having to read and understand the terms and conditions of an individual purchase as if it were a loan when so many customers are buying through BNPL every day.
In a similar vein, there may also be a risk of putting off customers by telling them their credit may be affected if they use BNPL, industry stakeholders have said.