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United Kingdom: Buy Now, Pay Later Transactions to Be Regulated to Protect Consumers

(Feb. 24, 2021) The United Kingdom’s Financial Conduct Authority (FCA) issued a report on February 2, 2021, about the burgeoning use of interest-free “buy now, pay later” agreements and set out 26 recommendations to the U.K. government, including an urgent call to introduce legislation to regulate the unsecured credit market.

The COVID-19 pandemic resulted in a rise in online shopping transactions and a corresponding increase in the use of financial products that allow individuals to spread the payment for a retail product over a number of months without paying interest. In 2020, use of such products tripled, with 5 million people entering into these agreements, comprising £2.7 billion (approximately US$3.72 billion) in sales. While this figure comprises only 1 percent of the credit market, in September 2020, the FCA expressed concern over the rapid and continued growth of this unregulated type of financial product. As a result of the growth, the FCA announced it would undertake a review of the unsecured credit market.

Unregulated buy now pay later transactions are short in nature and “take the form of deferred payment or short installment loans,” utilizing an exemption in Article 60F(2) of the Financial Services and Markets Act (Regulated Activities) Order 2001 (as amended by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013). As a result of the unregulated nature of these transactions, the FCA noted that it is relatively easy for individuals to accrue debts of up to £1,000 (approximately US$1,300) that are not reflected on credit reports. It also expressed concern that financial providers do not conduct sufficient checks on the consumers to ensure they are able to repay their debts.

The report acknowledged that, while the amount involved in an individual interest-free buy now pay later agreement is typically low, there is a concern that some consumers may be using these financial products for multiple purchases and, as these are not subject to the same checks and scrutiny as other forms of credit, consumers may be taking on unaffordable levels of debt. Reports have noted that more than one in 10 customers of a large bank utilizing buy now, pay later agreements were already in arrears. The FCA also highlighted how late payment fees generated by these notes typically “make up a significant portion of the firms’ overall revenue.”

Among the FCA’s 26 recommendations, one stated the urgent need to regulate all buy now pay later products:

Regulatory oversight is appropriate to ensure that the product develops in a way which is beneficial to the end consumer. As a matter of urgency, the FCA should work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation. Once the necessary powers are obtained the FCA will need to develop a proportionate regulatory framework including addressing how credit information should work within this market.

Given the urgency of regulating this product, the report further noted that a public timetable should be set out detailing the changes to be implemented and that an accountable executive be appointed to ensure the recommendations are carried out.

On the same day the report was published, Her Majesty’s Treasury announced that it intended to act upon the recommendations of the FCA and that it will ask the government to introduce legislation “as soon as Parliamentary time allows” to regulate buy now, pay later agreements in order to act swiftly to protect consumers. H.M. Treasury stated that the regulations will subject the providers of these products to FCA rules and, thus, require them to conduct affordability checks on consumers prior to lending and to have safeguards in place to ensure that customers are treated fairly. The FCA will be responsible for the oversight of these financial products.