Buy now, pay later has become a staple in the world of ecommerce – in 2021, 28% of UK shoppers reported that they regularly used BNPL and by 2022 it was valued at $248.1 billion (USD) as a global industry.
With this growth and level of consumer activity comes great responsibility, and BNPL is receiving increased scrutiny from government bodies and financial regulators.
We’ve already touched on how the Consumer Financial Protection Bureau in the US is introducing tighter regulations on BNPL providers. Similar activity is coming into place in the UK, with the recent consultation on draft legislation put forward by the Financial Conduct Authority.
The FCA has announced it will be introducing regulatory changes for BNPL providers, in order to protect consumer rights and ensure third-party financing companies are adhering to practices of responsible lending.
Here, we’ll outline the changes that UK BNPL providers will face and look at how they will impact consumers and retailers. Read on for everything you need to know about the new FCA regulation changes for the buy now, pay later industry.
What is the Financial Conduct Authority (FCA)?
The Financial Conduct Authority (FCA) is an organization that regulates financial services across the UK. Its purpose is to protect consumers, ensure the stability of financial industries, and promote fair and healthy competition between financial providers.
The FCA operates independently of the UK government and works to provide guidance and recommendations on legislation that relates to financial institutions and practices across the nation. It recently has turned focus towards BNPL.
The relationship between the FCA and BNPL
Until recently, the majority of buy now, pay later activity has been unregulated in the UK. The FCA has made recommendations to some of the largest BNPL providers, including Clearpay, Klarna, Laybuy, and Openpay. These recommendations helped to change and shape BNPL practices and policies and are an indication that the FCA is beginning to look much more closely at the at the UK’s buy now, pay later industry.
In February 2023, the FCA released a consultation on draft legislation for regulation of buy now, pay later. This is a document that outlines the areas in which the FCA is looking to introduce official rules in terms of how BNPL providers operate.
Once approved by the UK government, BNPL providers will officially be regulated by the FCA.
Why is the FCA now focussing on BNPL?
With the steady growth of BNPL, it’s vital that consumer rights are being monitored and protected. Regulation by the FCA means that buy now, pay later providers will be monitored and held accountable, raising the standards for responsible lending.
It also means that consumers (and retailers) will have official channels in which they can raise complaints and concerns about BNPL providers that are not adhering to FCA regulations.
What changes is the FCA introducing for BNPL providers?
The focus of these new regulations is on third-party lenders, which means:
- Instances where credit is being provided by a person or organization that is not the same as the service/product provider or retailer
- The agreement is interest-free, repayable in 12 or fewer instalments within 12 months or less.
Put simply, that encompasses all popular BNPL providers. We’ve summarized the new regulations that buy now, pay later platforms will be required to adhere to:
- Official FCA approval: BNPL providers in the UK will have to be officially approved by the FCA in order to operate.
- Financial promotions: The FCA and supporting bodies will provide direction on the way that BNPL can be marketed towards consumers, which means advertising must be fair, clear, and not misleading.
- Affordability: BNPL lenders must ensure loans are affordable for consumers by carrying out affordability checks.
- Credit reporting: The FCA will look to introduce BNPL into credit reporting (as stated: “the consultation response also set out the government’s view that there should be clear, consistent and timely credit reporting of newly regulated agreements, across the three main credit reference agencies”).
- Consumer protections: BNPL customers will be able to complain directly to the Financial Ombudsman Service (FOS).
How does this impact BNPL providers and retailers who utilise BNPL?
Buy now, pay later providers will have to take a close look at their operations to ensure their business aligns with FCA standards and they are able to meet the requirements needed for FCA approval.
This encompasses all aspects of responsible lending, including affordability considerations, transparency for customers, and being able to offer adequate support.
Underwriting standards will be under close scrutiny, and providers will be required to put in adequate testing to ensure the customers that are being approved for BNPL can afford their repayment plan.
From a marketing standpoint, BNPL providers must ensure they are communicating to customers in a clear way, and that any advertising about BNPL is not misleading.
The responsibility for these requirements will sit with BNPL providers and not the retailers that use their services. However, retailers should be mindful and monitor the activity of the BNPL providers they work with to ensure these regulations are being met.
How does this impact BNPL customers?
Consumers that use BNPL platforms can expect clearer communication, more transparency, and a general tightening across the industry.
Approval rates may be stricter for some customers, and there is the potential the use of BNPL will begin to show up on consumer credit reports.
Customers will also have a clearer line of support if they need to raise complaints or concerns about BNPL providers, as they will be able to reach out directly to the FOS.
How BNPL providers can adapt to new FCA regulations
The new FCA regulations are designed to protect consumers from entering a financial agreement that they can’t afford to repay or signing up for something they’re not entirely aware of.
BNPL providers that are adhering to responsible lending practices should have no trouble adapting to the regulations. This is an opportunity to reflect on operations and ensure they’re maintaining best practice in terms of:
- Responsible underwriting: Ensuring affordability is being properly assessed before approving customers for BNPL financing.
- Transparency of terms: Clearly communicating all fees, penalties, and clarity surrounding repayment and debt collection.
- Proper credit reporting: Closely monitoring FCA regulations surrounding credit reporting and providing transparent communications to relevant credit bureaus.
How do the new FCA regulations impact Splitit?
Splitit is not a lender. We provide technology that enables merchants to offer their customers the ability to use the credit they have already been issued by their credit card provider in order to fund their installment payment plan.
Therefore, the service falls under their credit card terms and conditions and is already compliant with FCA standards.The tighter regulations will bring about positive change and protection for consumers and we’re looking forward to the benefits they will see as a result.
Our existing card-based system means we don’t require customers to take out additional credit or a loan – approval is based on the existing space on their credit cards, which means affordability has already been assessed.
We’ve always prioritized clear and transparent communication – customers do not pay any fees or late-payment penalties, and we never sell customer data onto third parties.
As regulations begin to settle in and reshape the BNPL industry over the next year, the FCA will continue to monitor and update its guidance as consumers and providers respond to the changes.
Of course, this is just the beginning. BNPL providers must react quickly to this increased scrutiny and ensure they’re able to meet the standards of responsible lending that the FCA have introduced.
Learn more about how we’ve responded to the great shakeout in the BNPL industry and get in touch with our team to learn how you can offer customers a responsible BNPL solution with Splitit.