HM Treasury Consultation on Regulation of BNPL - Which? response

Summary

• Which? welcomes the opportunity to respond to HM Treasury’s consultation on the regulation of Buy Now Pay Later (BNPL).
• The proposal to regulate Buy Now Pay Later is both welcome and necessary. While our research shows that consumers enjoy and value BNPL as a payment option, as a credit product, there is the potential risk that future payments could become unmanageable. All credit products involve some risk and although the risk for BNPL maybe lower compared to other credit products, regulatory oversight of this market is needed - particularly given that our research shows consumers already think BNPL is regulated.
• We agree with the Government's objective of taking a proportionate approach to regulation. When used appropriately, BNPL is capable of improving consumers’ financial positions. We agree that regulation should seek to protect consumers without unnecessarily stifling innovation or unduly restricting consumers’ access to the product. We are particularly supportive of HMT's proposed consumer protections - specifically affording consumers Section 75 rights and access to the Financial Ombudsman Service (FOS) - as consumers’ access to redress is an essential part of appropriate financial protection.
• However, the need for regulation to be introduced as a matter of urgency remains. We were pleased with HMT's swift commitment to regulate BNPL following the Woolard Review in February 2021. However, we have concerns over the timeline for effective action, given the length of time that has elapsed so far and the market developments that continue to emerge. As well as the need for urgent regulation, we are concerned that failure of the regulation to keep up with the fast-paced evolution of BNPL could lead to avoidable detriment within the sector, deepening consumer harms while BNPL providers continue to consolidate their market shares and normalise the product’s use. The Government should set an ambitious timetable for legislation, and for implementing the specified requirements.
• Our research provides valuable insight into the potential harms in the BNPL market. To place ourselves in a position to seek targeted and proportionate solutions to potential harms in the BNPL market, we conducted both quantitative and qualitative research, and found that:
  • The typical BNPL user has characteristics that contribute to consumer vulnerability: they are more likely to have dependent children, to have experienced a major life event, or to have defaulted on another form of credit or household bill in the last twelve months than non-BNPL users.
  • BNPL users are predisposed to trust BNPL brands’ marketing, not interrogate firms’ terms and conditions and make snap decisions when it comes to making payments.
  • Some BNPL users believe they could not access alternative forms of credit at short notice.
  • The proportion of BNPL users who have missed payments and the amount of debt held differs across brands within the BNPL market: consumers who use smaller BNPL providers report higher amounts of outstanding debt and are more likely to have missed a payment.
  • Some BNPL brands were prepared to take action against users who have missed payments, such as reporting late or missed payments to Credit Reference Agencies (CRAs) and/or issuing debt collectors to recover missed payments. However, the measures taken by providers are inconsistent.
  • There is a lack of understanding of the product: most participants did not see BNPL as a form of borrowing, instead describing it as a ‘way to pay’ or a ‘money management tool’.
  • Consumers lacked engagement with the prospect that they may struggle to repay their BNPL agreement. BNPL agreements also distort consumers’ views of assessing affordability, anchoring them to the instalment payment rather than the total cost of the item. 

Our research suggests that adding appropriate friction to the borrowing process to ensure consumers understand the nature of the product, and the prominent provision of key information such as payment terms, late fees and how missed payments can affect future credit assessments, could help reduce potential harm.

• While we agree that certain activities under the exemption, such as invoicing, should fall outside the scope of regulation, we feel that BNPL cannot be easily distinguished from Short Term Interest Free Credit (STIFC). We recognise the challenges faced by the government in determining the regulatory scope of BNPL, especially given the diversity of products. However, our research has shown that the wider financial services market already makes decisions impacting consumers that cut across the proposed parameters outlined in the consultation. For example, some providers specifically target private healthcare bills, vet costs and other larger transaction items over a longer period of time. As such, we believe the scope of the proposed regulated activities requires widening; especially given that consumers already believe that the BNPL market is regulated. To only regulate part of a market where providers currently operate will increase confusion for consumers, providers and retailers, and potentially lead to harm.
• We are concerned that the proposals as currently set out could allow BNPL providers to make small changes to their activities to avoid being covered by regulation, should they wish. We are mindful that the regulation must be ‘futureproofed’ and should not quickly become redundant. The proposed separation between BNPL and STIFC creates this risk. There has already been a significant proliferation of providers and offerings within the BNPL market since the Woolard Review, with expectation of further growth and expansion. As BNPL is a fast-evolving sector, the regulator will need the necessary remit to keep on top of developments to ensure consumer protections are applied consistently, and that firms are not able to side-step regulation. We recommend that the government works closely with the FCA to ensure the regulator will have the necessary powers to regulate the market in the future, and be able to adapt swiftly to expected market changes.
• We urge the Government to review the provider-merchant relationship within the BNPL model and to ensure the FCA has powers to continue to monitor it. We agree that, in the first instance at least, retailers may not need to be FCA regulated - so as not to disproportionately impact SMEs. Retailers stand to gain from the provider-merchant relationship, with providers promising higher conversion rates, higher average order values, increased consumer loyalty and lower abandoned baskets at checkout when consumers use BNPL. Given this, there is a risk of them prioritising their relationship with each other over obligations to offer affordable credit to consumers. This balance has already been called into question over how BNPL is being marketed to consumers and how BNPL providers are competing for business by guaranteeing higher customer approval rates. We recommend that the Government should ensure the FCA has powers to amend the obligations on retailers should current intervention, such as those relating to advertising, fail to deliver the appropriate protections.
• Undertaking appropriate affordability assessments is essential in mitigating potential consumer harm. Providers are taking varying approaches when it comes to both affordability and credit risk. Appropriate affordability assessments should be undertaken to mitigate the risk of harm to consumers. Our research found a need for this, on the basis that consumers often misjudge their ability to afford BNPL agreements. We recognise that there are currently limitations in the credit information market and that other methods of assessing affordability, such as open banking, also have limitations. With that in mind, we feel affordability assessments should be outcomes-based, allowing flexibility in the approaches taken by BNPL providers. However, it is essential that when an affordability assessment is made, all lenders are able to see an individual's exposure to all debts, and that this information is reflected on the consumers’ credit file in a proportionate way.
• A review of the CCA and reform to the current credit framework is required, but this should not delay the regulation of BNPL. We welcome that HMT has recognised that aspects of the current consumer credit regulation will not be appropriate for the regulation of BNPL, and ask the Government to consider reviewing the infrastructure in its totality. We welcome the recently resumed Credit Information Market Study (CIMS) that is underway, as we believe that the current CRA infrastructure is under-serving many consumers and is in need of reform.