UK to tighten BNPL regulations with ‘affordability checks’

The UK has targeted tougher regulations for the buy now, pay later (BNPL) sector as well as other forms of short-term interest-free credit, with new proposed standards.

Under the new plans, BNPL providers would be required to carry out “affordability checks”, ensuring customers can afford their products.

The exact procedure for checking affordability is yet to be confirmed, with a consultation on draft legislation to come towards the end of the year.

The government plans to lay secondary legislation by mid-2023, before the financial markets regulator, the Financial Council Authority (FCA), is set to consult on its rules.

During a consultation earlier this year, the government had echoed concerns around lack of requirements for BNPL providers to undertake creditworthiness assessments and there being no visibility on credit files, impacting other lenders’ abilities to undertake assessments.

There had also been worries about the ease for consumers to take out multiple products across different lenders.

The new rules outlined in the plans would also see providers need to be approved by the FCA, while borrowers would be enabled to take complaints to the Financial Ombudsman Service.

Financial promotion rules would also be changed, to require advertisements from BNPL vendors are “fair, clear and not misleading”.

Further, the rules would apply to businesses that partner with third-party lenders to provide credit.

During an upcoming consultation, the government will ask for stakeholder feedback to confirm whether the rules should also apply to online merchants that directly offer credit for the purchase of their own products.

John Glen, economic secretary to the UK Treasury, commented BNPL can be helpful for people wishing to manage their finances, but the government had sought appropriate protections for consumers.

“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,” Mr Glen said.

The government has signalled there will be exemptions for specific agreements where there is “limited risk of potential consumer detriment” and where regulation would otherwise adversely impact day-to-day business activities.

The UK has sold the move as part of a greater plan to grow the economy and tackle rising costs of living.

Meanwhile, in Australia, media reports have said freshly appointed Financial Services Minister, Stephen Jones, has indicated that the government is now seeking to regulate the BNPL sector, under credit legislation.

The local industry has developed a code of practice, but Mr Jones has previously told Mortgage Business sister brand nestegg that the Labor Party would want to ensure BNPL operators are not swimming outside the flags.

“At the moment [the industry code of practice] doesn’t apply to everyone, so what we’ve said to industry is that we’ll have a look at how it’s operating, we’ll let it run for a bit and we’ll see where the gaps are,” he told nestegg prior to the election.

APRA recently told Australian banks that they will need to account for BNPL debts when reporting debt-to-income ratios to the regulator from September.

A study from ASIC in late 2020 showed around 22 per cent of BNPL customers had prioritised paying off their buy now, pay later debt over other loans or bills.

[Related: Fears US recession may impact Australia]