The UK has an opportunity to lead the world on BNPL regulation. Does it risk falling behind?
The UK risks applying outdated regulations and falling behind Australia on BNPL regulation, writes Michael Saadat, International Head of Public Policy, Clearpay
The Australian Government’s announcement that it will support fit-for-purpose regulation of ‘Buy Now, Pay Later’ (BNPL) provides much needed certainty regarding the future of an innovation that is loved by millions of customers globally.
Yet as Australia pushes ahead with a proportionate legislative response, the UK risks applying outdated regulations and falling behind its international counterparts.
The UK’s future as a ‘tech and science superpower’, has always been cause for optimism. For the country’s fintech sector, the vision of a supportive regulatory regime that fosters innovation outlined in 2021’s Kalifa Review created further momentum.
BNPL regulation has been a topic of discussion for the government and industry since 2021, so the launch of Treasury's consultation paper in February was a positive step for both the sector and for BNPL users.
However, a lot has changed in the past two years. BNPL has become integral to UK e-commerce, with nearly £1 in every £8 spent online in January alone being sourced from BNPL providers.
Consumers have embraced BNPL because it is simple, transparent and helps them avoid high interest debt traps.
Clearpay has always advocated that the best regulation will safeguard consumers and facilitate innovation.
We support consumers having access to the Financial Ombudsman Service and we support the application of liability protection rules (known as ‘Section 75’). With the right consumer protections in place, BNPL’s interest-free model will continue to help reduce consumers’ long-standing reliance on expensive revolving debt products.
However, the current proposals from the Government do not account for how BNPL is constructed or how customers use it.
Some elements of the regulation will stop BNPL from delivering the very benefits that consumers know and love. Worse still, it will not fully protect consumers in the best possible way nor deliver good customer outcomes for a number of reasons.
Size matters – particularly with loopholes
The current regulation will be limited to third-party lenders only i.e. the innovative fintechs that pioneered the consumer-centric BNPL model.
Large retail and technology companies will remain free to offer their own unregulated direct-to-consumer BNPL services, despite the recognition that regulation should apply in a technology-neutral way.
This means that BNPL users will only be protected some of the time. This will create customer confusion because the same rights of redress and protection will not apply when using direct-to-consumer BNPL offerings.
Protections that work in practice
The proposed legislation threatens to hamper the 21st-century customer communications already put in place by many BNPL providers.
We agree that BNPL providers should ensure that customers are well-informed, but rather than enforcing rules in the Consumer Credit Act - which celebrates its 50th birthday in 2024 - we should apply a principles-based approach that is reflective of how consumers spend and manage their money today, through their smartphones.
Clear, simple and transparent credit agreements are the best way to inform consumers. Overloading them with excessive small print that they won’t read every single time they make a purchase is not.
This isn’t required every time a consumer makes a purchase on a high interest credit card, so why should it apply to BNPL? The proposals will also force BNPL providers to issue outdated and legalistic formal notices when customers have missed payments.
These prescribed notices were originally designed to assist people with longer-term loans and credit agreements with lengthy repayment periods. They do not align with the short-term construct of BNPL - with Clearpay, a purchase is paid off within just six weeks.
With today’s technology, modern payment companies communicate with customers in real-time and have rapid, intuitive and innovative customer service features in place.
At Clearpay, we send timely payment reminders by text and email, and automatically pause an account as soon as a single payment is missed.
Under the proposed regulation, legal notices in relation to missed payments would potentially be received after a BNPL transaction has concluded, which could create consumer confusion and even distress.
The right path to the right regulation
The fact is that BNPL is now mainstream - over 10 million Britons use the products regularly, and the average consumer is aged 36. 95 per cent of our transactions are paid on time, and we know they choose BNPL because it is straightforward and helps them budget their spending.
The innovative fintechs that created BNPL understand how consumers use our service and how the products deliver good outcomes.
The new Consumer Duty requires all financial services firms to focus on delivering good customer outcomes. Outcomes-focused regulation is exactly what fintechs need to help allow them to continue to innovate and deliver better products for consumers and businesses.
Alongside Australia, other jurisdictions - such as the EU - are working towards delivering fit-for-purpose regulation of BNPL.
The UK is a world leading jurisdiction for fintechs and BNPL is part of the success story. In a post-Brexit world, the tech sector will be a key driver of growth and sustainability.
The Government should follow the consumer vote on BNPL and deliver a regulatory framework that protects consumers, promotes competition and fosters innovation.