FCA to regulate BNPL arrangements following publication of the Woolard review of unsecured credit

Former Financial Conduct Authority chief executive Christopher Woolard has published his review into the unsecured credit market. The Government has already responded to one of his key recommendations and has confirmed that it will bring ‘buy now pay later’ products within the scope of FCA regulation. However, it is unclear how long this process will take – Mr Woolard says that the changes are required “urgently”, but new legislation normally takes many months to complete its passage through Parliament, and a letter to Mr Woolard from Economic Secretary to the Treasury John Glen MP simply says that the Government will “take forward the necessary legislation as a matter of priority.”

The review found that the BNPL market in the UK quadrupled in size during 2020, with the total value of BNPL transactions during the year being £2.7 billion. Five million people have used a BNPL facility since the start of the pandemic. Alongside the significant growth in this market comes the potential for significant consumer harm, with more than one in ten customers of a major bank using BNPL reporting that they are already in arrears, having signed up to repayment arrangements that they are unable to afford. Now, with FCA regulation on the horizon, BNPL firms can expect to have to comply with rules on affordability assessments and will only be expected to approve customers who are likely to be able to meet their repayment commitments. They can also expect to be subject to the jurisdiction of the Financial Ombudsman Service when customers make complaints.

BNPL arrangements have not previously been regulated by the FCA as there is no need for any additional amounts to be repaid and hence no regulated credit agreement is created. Instead, the purchaser simply repays the purchase price in instalments over a period of time. However, the review paper says that there is a risk that, given this repayment arrangement, consumers may not apply the same level of scrutiny to their decision making as they would for other credit products, including consideration of the potential consequences of failing to repay.

Then when customers fail to repay, providers might currently take various steps, including imposing late payment fees, passing the debts to collection agencies and/or reporting the matter to credit reference agencies. All of these could potentially lead to consumer harm.

Other recommendations in Mr Woolard’s review include:

  • Providers of free debt advice need secure long-term funding, and funding needs to be in place to help the poorest consumers pay fees when applying for debt relief orders
  • The FCA must work with the UK government, devolved administrations and insolvency regulators to ensure that suitable debt solutions are available to best serve people in financial difficulties. This should include taking steps to stop consumers being driven towards unsuitable solutions
  • The FCA should look at whether it needs new rules to ensure different firms offer a more consistent approach when customers require forbearance
  • The FCA should work with the Government and Bank of England to reform the regulation of credit unions and Community Development Finance Institutions, with a view to developing affordable alternatives to high cost short-term credit. More should also be done to encourage mainstream lenders to enter the short-term lending arena, and to address barriers preventing consumers having a better awareness of alternative credit products
  • The FCA should conduct a review which should set out clear outcomes covering repeat lending and persistent debt across all products and should look at whether additional protections or guidance are needed around the re-lending of fixed-term loans
  • Employer Salary Advance Scheme providers should be encouraged to develop a code of best practice. Major employers should be encouraged to only contract with ESAS providers adhering to this code