Alice wants a new laptop computer, but it will take her a few months to save up. Because the online store offers buy-now-pay-later, she can order it today.

Dan has suddenly received a large bill he wasn’t expecting that must be paid immediately. He’s able to sort it by taking some of his pay early because his employer offers a salary advance scheme.

These are just two examples of buy-now-pay-later (BNPL) transactions that are becoming increasingly common across the UK.

These are short-term loans with a difference. They don’t cost the borrower a penny because there’s no interest on the debt.

As a result, they’re unregulated. They sit outside the scope of the FCA rules governing consumer finance.

Change is looming for the Buy-Now-Pay-Later market

Early plans for introducing regulation were set out in the Woolard Review, published by the FCA in early 2021. The government ran a consultation later that year, which closed in January 2022.

Policy options are now being considered. What’s certain is that regulation will be introduced in some form. The government has announced its intent to bring in controls to help protect consumers who take advantage of buy-now-pay-later products.

There’s clearly a market for buy-now-pay-later and the FCA acknowledges that ‘credit makes economies work and has a social purpose.’ 

Credit products have undergone continuous innovation, particularly in the last few decades as digital tools have made it easier to set up and manage short-term borrowing.

Recent trends have introduced products, such as the rise in employer advances and apps to facilitate this, that make debt easier to access and also cost-free – at least, to the borrower. In many cases, the fees are picked up by retailers, who benefit from additional sales, facilitated by the BNPL providers they partner with.

Features of the UK current credit market 

Recent FCA research indicates:

  • 8 out of 10 UK adults use regulated consumer credit services, typically credit cards.
  • 3 out of 10 adults avoid paying interest, by settling credit cards in full each month.
  • BNPL use quadrupled in 2020, used for an estimated £2.7bn of transactions.
  • Younger people are moving away from credit cards to BNPL products.
  • The 18-24 age group prefers borrowing from friends and family to credit cards or formal personal loans. 

There’s a trend away from long-established consumer credit products, such as credit cards, personal loans from banks and motor finance arrangements. The rise of BNPL is part of this trend.

One feature of these trends is that credit rating agencies lose sight of the full picture of the creditworthiness of individuals because some buy-now-pay-later products are excluded from their assessments.  

Providers of technology-driven buy-now-pay-later products are often relatively new organisations. 

Consumer awareness of these newer products varies significantly, with some not knowing whether they are a credit product. In addition, many consumers assume that because these are a form of financial service, they are regulated in a way that confers some protections and rights to the product user.

Implications of BNPL regulation

It’s too early to tell what form of regulation will be applied to buy-now-pay-later financial products. The government believes that while there is a ‘significant risk’ of harm to consumers through these products, there is ‘limited evidence’ of this harm occurring. As a result, some worry that the rule could be too light.

However, there will still be rules that financial services companies must abide by and, as the industry watchdog, the FCA has shown it’s not afraid to bite when the rules are broken.

One of the main concerns around buy-now-pay-later is how easy it is to access, and the potential harm this can bring. Because it’s closely linked with digital technology, it can easily become part of the consumer journey through a purchase.

Of course, many people like how easy it is to access and use. Lending decisions can be made very quickly, with algorithms and artificial intelligence delivering an immediate answer to a request.

However, making the customer journey so easy can lead to people making poor decisions, and being supported in these by the algorithms.

There’s also a risk of some people being excluded from the options that would benefit them because they don’t have access to the appropriate digital devices or information. 

The FCA is committed to applying regulation as consistently as possible, in part to avoid different outcomes for consumers of different types of financial services products. This implies that the current regulations around unsecured consumer credit are a guide to what will come for the buy-now-pay-later market.

How 1RS supports financial services providers

Regulatory change is an ongoing process in the financial services sector. Innovation and changing customer expectations bring up new opportunities and new issues, which lead to new rules or amendments to existing regulations.

All these changes can be hard to keep track of, as is all the data required to maintain compliance.

Our clients benefit from a set of governance, risk and compliance tools that make managing these processes much easier and more cost-effective, particularly when compared with juggling multiple spreadsheets, which is the common alternative.

We work with organisations of all sizes, from start-ups to long-established financial firms. Our solutions are scalable, and they will grow with you. 

To learn more about how the 1RS solution can help your business manage its regulatory compliance efficiently and effectively, get in touch with us today.