‘Regulate poorly now, pay later’ warns Coadec on FCA’s BNPL plans

In February 2021, the FCA published the long-awaited Woolard Review, promising to impose more stringent restrictions on the largely unregulated sector, however, there are fears among some industry specialists that the regulation could be headed in the wrong direction.

The Coalition for a Digital Economy, or Coadec as it’s more commonly known, is calling on the Financial Conduct Authority (FCA) to tread carefully when introducing tighter restrictions on the buy-now-pay-later (BNPL) sector.

"There is a real need for speed when it comes to BNPL regulation," Charlie Mercer, head of economic policy at Coadec, told AltFi. "This is because of two reasons. One there is clear evidence of consumer harm when consumers are not getting the best outcomes and using BNPL increases the amount they have to pay significantly."

"Secondly, there is such a demand for regulation because it will bring more consistency and transparency to the sector and will help solve the conflicting messages we often see in the press about buy-now-pay-later. At the current rate, it's just not sustainable, this is a classic example of where innovation has outpaced regulation."

Coadec has laid out five themes the regulators should focus on to prevent a potential misfire with regulation.

Firstly, Coadec is urging the FCA to focus on the BNPL firms and not the retailers they support after its research found that additional compliance requirements on the retailers’ end could see 68 per cent of e-commerce startups shift away from BNPL.

Secondly, the industry body is calling on providers to develop better affordability checks, most importantly, not undertaking a hard credit check.

Coadec has also outlined the credit rating industry as a whole needs to be dragged into the 21st Century by using smart data, like open banking or AI.

Clear, concise, and easy-to-understand information is the fourth topic on Coadec’s list. The group argues that all communications (including from third-party advertisers like influencers) mustn’t be misleading.

Late last year, the Advertising Standards Agency (ASA) branded four Klarna ads as ‘irresponsible’ after several influencers posted ads for the fintech linking spending (and borrowing) money with happiness.

And, finally, BNPL providers must provide customers with a better complaint network as most BNPL fintechs exist outside the realm of the Financial Ombudsman’s reach.

As it stands, the BNPL sector is largely unregulated and is exempt from consumer credit rules under the Financial Services and Markets Act, meaning that there have been instances of inconsistent or nonexistent credit checks, a lack of consumer protection and no formal complaints process.

"There's this urgency around regulation in the BNPL sector, not just about the pace at which it's needed but also getting this right," Mercer added.

For the FCA to step up to the plate on BNPL restrictions, it probably has to do it quickly, given the rapidly changing rate of BNPL success.

Sadly financial regulation is all too often too little, too late.