By Lars Mucklejohn
In 2021, a government-commissioned report warned of the “urgent” need for regulation of the buy-now pay-later sector. But three years on, firms have been left hanging in uncertainty as they head into the general election. Lars Mucklejohn and Charlie Conchie look at why
As officials from the Treasury and Financial Conduct Authority (FCA) sat down with a buy-now pay-later (BNPL) boss to chat through their impending regulatory clampdown last year, frustration boiled over.
“Have you used BNPL products?,” the fintech chief asked the pair leading the work for the government and FCA.
The question was met with silence. In fact, the regulator and government worker hadn’t even downloaded any BNPL apps. For the boss in attendance, the episode captured the misunderstanding of a sector which had exploded into the public consciousness through the pandemic and was quickly demonised through loud warnings of a looming debt crisis.
“Legal loan sharks” crept into the Westminster lexicon and a government commissioned report, led by the former interim boss of the FCA, Chris Woolard, warned of the “urgent” need for tailored regulation.
But three years on, and that regulation is nowhere to be seen.
‘It just got complicated’
Last summer, the UK government pressed pause on its plans to regulate buy-now pay-later (BNPL) products. Now, insiders tell City A.M. there has been radio silence on when the industry might expect the new rules that will shape its future – with the issue thrown only deeper into turmoil by Rishi Sunak’s move to call a general election on 4 July.
Reports emerged last year that the pause was partly triggered by firms threatening to withdraw from the UK in favour of more light-touch jurisdictions.
However, people familiar with the industry’s discussions with the government say emphatically that no major firms had warned excessively tough regulation would force them to quit the UK.
“The suggestion that the industry said to the government ‘we’re going to shut down our businesses unless you don’t do this’ – I don’t know where that suggestion has come from,” one senior industry source tells City A.M.
“I think the more boring answer is that it just got complicated.”
Treasury tensions
Insiders say tension mainly resulted from concerns over whether parts of existing rules that were drawn up half a century ago are fit to regulate online BNPL products.
BNPL enables consumers to pay for items in weekly or monthly instalments, mostly free from interest. This form of lending has surged amid the cost-of-living crisis, with the likes of Klarna becoming one of the UK’s biggest short-term credit providers.
However, regulators and policymakers have raised concerns over a lack of transparency and affordability checks that could lead to vulnerable consumers unknowingly falling into debt.
The Treasury published draft legislation last February that it said would protect roughly 10m consumers. In it, certain sections of the Consumer Credit Act (CCA), which was drawn up in 1974, were disapplied from the planned BNPL rules while others were dropped onto the proposed changes.
“There was still a range of obligations that would be applicable to BNPL that were potentially problematic,” says Michael Saadat, global policy chief at BNPL firm Clearpay. “This is really a reflection of the fact that the CCA is 50 years old and does need modernisation.”
A source close to Klarna’s dealings with the government says that while the products are in need of regulation, those rules “cannot just be a lift and shift from traditional credit card regulation or traditional fixed-sum loan regulation”.
BNPL firms collectively rallied against “unduly copy-and-pasting” elements of the CCA, particularly an initial “credit agreement” that would have required a static form for consumers to sign in every credit application and every BNPL transaction, significantly slowing down online purchases, people with knowledge of the matter say.
“You’re bombarding the consumer with information they’re not seeing on a like-for-like credit card purchase,” the source close to Klarna argues. “You’re restricting access to these products unduly.”
They add: “It wouldn’t kill the product, but it would change the dynamic of how BNPL is being used and what it’s being used for.”
Fintech trade body Innovate Finance has instead proposed secondary legislation that would allow the FCA to create a bespoke regime for BNPL building on its Consumer Duty with some elements of the CCA, including payment protection.
“This means that the BNPL industry will become regulated years before CCA reform is finalised, without the BNPL regulatory regime being temporary or subject to significant change once a newly-reformed CCA is introduced,” says Adam Jackson, director of policy at Innovate Finance.
In the dark
Ministers have committed to a wider reworking of the CCA, but the industry remains in the dark on whether its specific recommendations will pass muster with Whitehall.
“We’re still awaiting feedback on where that is, and whether that is going to be a palatable way forward,” the source close to Klarna says.
“It will be a kill or cure for those smaller firms. Regulation will be a test for them.”
Analysts have warned that the spectre of regulation poses a major threat to some firms that are already struggling with cost pressures.
One BNPL executive tells City A.M. that amid higher interest rates, funding pressure and intense competition, some smaller firms are relying on late repayment fees for a major chunk of their revenue – a model he says “would never work in a regulated form”.
“It will be a kill or cure for those smaller firms,” says another senior industry figure. “Regulation will be a test for them of whether their business model and approach are up to regulated standards.”
But the delay in regulation is not just hitting specialist providers. Big banks have also tried to cash in on the trend in recent years through a range of product launches, mostly as extensions of their FCA-regulated credit card businesses.
A senior banker at one of these companies reveals that when his firm was first moving into the space, it had to convince the FCA that “it was not a gimmick”.
He adds that the bank “looked at all options”, including a point-of-sale offering like Klarna, but decided it was “uncomfortable being in an unregulated space”.
The delay in regulation has also exposed political faultlines, with Labour repeatedly slamming the government for “dithering” and leaving “millions of consumers at risk from bad actors”.
Another BNPL executive says he thought the delay in regulation was partly due to “political pressure” and fears of “squeezing out segments of the credit market” before the general election.
The government’s delays have opened a gap for the opposition, and last November shadow City minister Tulip Siddiq confirmed the party would push ahead with regulating the sector if elected to power.
While the FCA has repeatedly said it is ready to regulate the sector, any movement is contingent on the government laying out the necessary legislation.
And as both parties mount their pitch to business over the next few weeks, this small fintech sub sector will be looking for any signal on when – and if – that is ever actually likely to happen.
