Tue 12 Jul 2022

UK Government confirms future regulation of Buy-Now Pay-Later

Last month was a particularly busy period in the Buy-Now Pay-Later ("BNPL") sector.

Klarna reporting UK customer data to credit reference agencies

On 1 June, Klarna, one of the largest BNPL providers, began reporting its customer data to credit reference agencies in the UK for the popular short-term credit products such as Pay in 3 instalments and Pay in 30 days.

Klarna has started sharing its 16 million customers' data, allowing this debt and repayment information to form part of a customer's credit score. However, this data will only affect customers' credit scores from 2023.

This change may have come as a surprise to customers and there is a possibility that some will switch to use other BNPL providers to avoid these debts affecting their credit score. However, as the chief executive of Klarna has stated it offers an easy and accessible way for customers to improve their credit score without having to get an interest-bearing product, such as a credit card.

UK Government confirms regulation of BNPL

Just a few weeks after this reporting came into effect, on 20 June the Government published its response to its consultation on the regulation of BNPL and short-term interest-free credit ("STIFC") products. The response follows the consultation held in late 2021 and the Woolard Review which looked into potential consumer detriment associated with these types of short-term credit products. The Government response confirmed what many expected - BNPL will in future fall within the scope of financial services regulation.

In particular, the response confirmed the Government's intention to:

  • Amend the scope of regulation to include BNPL products, as well as currently exempt STIFC products when they are provided by third-party lenders.
  • Regulate STIFC products provided directly by merchants where it is offered online or at a distance. However, the Government is calling for further stakeholder engagement to fully understand the scale of this type of lending.
  • Tailor the application of the Consumer Credit Act 1974 to these products, and elements of lending practice most linked to potential consumer detriment.

In line with the 2021 consultation paper, the Government's response emphasises that the scope of regulation should be proportionate, so that it targets the products with the potential for consumer detriment but does not frustrate the provision of key financial services. Therefore, certain exemptions will be allowed for particular agreements where there is a low risk of consumer detriment, and regulation would adversely hinder regular business activity. These exemptions are likely to apply to invoicing, interest-free agreements which finance contracts of insurance, charge cards, trade credit and employer/employee lending.

Given the widespread use of BNPL products and growing concerns about the associated debt, the Government's plans for future regulation have been welcomed. With the cost of living continuing to rise, it is likely that the use of these products will continue to expand. More companies are including BNPL options as part of their service, with Apple being one of the recent companies announcing, 'Apple Buy Later' which will soon allow users to spread the cost of a purchase into four payments over six weeks. It is hoped the proposed regulatory oversight will help protect consumers suffering financial detriment with the introduction of affordability checks, stricter advertisement rules and the right for consumers to complain to the Financial Ombudsman Service.

What next?

Although the Government response has been published, there is still a long way to go before these changes come into effect. A consultation on draft legislation will be undertaken towards the end of this year, with secondary legislation to follow by mid-2023. The FCA will then consult on how it will regulate the sector.

If you have any questions about how changes to the regulation of BNPL and STIFC products may affect your business, please let us know.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice