If I told you there was a financial services product in the UK that has over 10 million customers, is getting bigger every day, but isn’t regulated, you might think that a bit odd. If I then added that it’s been here for some time, and the retailers who offer it are told that it will significantly increase their sales and the total amount customers will spend with them, you might think that’s even odder. You might then begin to wonder what the Treasury and our consumer regulator, the Financial Conduct Authority (FCA), are doing about it. The product is Buy Now Pay Later (BNPL).

I sat on the Woolard Review into Consumer Credit, which published its report in February 2021, and recommended that Buy Now Pay Later (BNPL) should be regulated, which the FCA and the Treasury both accepted and, in fairness, the FCA is keen to regulate the BNPL market. That being said, it now looks like BNPL will not be regulated until 2023, as legislation is required. To me this is far too long as by 2023 there could be millions more customers using BNPL in the UK, an unregulated product without any consumer protections. By that time serious damage to consumer welfare could be done.


Calling for regulator action

In my view, we need to quickly empower the regulator to allow them to act on unregulated products immediately, so consumers can be protected. Regulation can be temporary in nature, until the product is both fully regulated and we have seen how it performs across the economic cycle. With Fintechs moving so fast, unless the regulators can move as fast, we’ll get more and more situations where financial service products are being used by millions of people, without any consumer protection. This cannot be right, and the FCA needs the authority to stop it happening, as customers are being impacted now.

The Woolard Review found that one in ten BNPL customers are already in arrears with other lenders when they used the product. Now, if that one in ten is applied to the 10 million customers that use BNPL in the UK today, that’s a lot of customers who could be suffering customer detriment but have no protection such as section 75 of the Consumer Credit Act, no recourse to the Financial Ombudsman Service (FOS), and no access to forbearance.

Now, before you say I’m voicing concerns against BNPL because I’m the CEO of a Bank whose leading product is a credit card well, actually, I’m not. I think BNPL can be a useful product for some consumers, and it’s perfectly possible that PFG, at some point, could potentially enter the BNPL market. The only reason I’m raising concerns is because the product is unregulated, and if things go wrong for the consumer, they have no protection.

At last, though, we are finally making some progress on BNPL regulation. The UK’s Treasury is conducting a consultation on BNPL, and how it should be regulated. This is very important, as out of this the FCA will create the regulations which will apply to BNPL.


Looking closer at BNPL

BNPL is not a straightforward product to regulate as it doesn’t charge the customer interest but does, in effect, loan them money. It is the retailer that is charged a fee for the customer using BNPL. In return for the fee, the BNPL industry claim customers will spend more with the retailer, covering the cost – a win-win.

In return for using BNPL, the customer pays nothing more than the price of the goods at the checkout, but then pays for the goods over a series of payments. It is only if the customer misses a repayment that they might incur fees and could be passed to debt collector agencies. In this scenario, which I do not believe is always fully understood by the customer at the outset, the costs to the customer can potentially increase significantly.


The dangers of BNPL if not regulated

First, the customer could be mis-sold the product, as appropriate and proportionate regulatory affordability assessments are not carried out. When a customer uses credit under the FCA rules, they must be taken through an affordability assessment first. This looks at their financial situation, and makes a judgement on whether they can afford to repay the loan, without them cutting back on spending on essential goods like food, utility bills, council tax, etc. If they can’t, the loan is not granted. At present, there’s the potential that some BNPL customers are accessing the product, when it is unaffordable and where appropriate regulation would prevent this happening.

The second problem, whether the customer should have used the product or not, is that they have no access to redress if something goes wrong. If you use a financial services product that is regulated, and get into difficulties, or experience a problem, you can seek forbearance or make a complaint to the FOS. They will independently review the case, and if they decide the provider has made a mistake, the customer will get full redress which can include compensation. As BNPL is not regulated, customers can’t go to the FOS.

Thirdly, and this is an issue for other FCA regulated credit providers, some BNPL providers do not inform the credit reference agencies that someone is using their product, including how much they owe. This makes life difficult for other credit providers, because they could in fact be unwittingly mis-selling their own product to a customer, as borrowers might have failed the affordability assessment if the BNPL information was on the customer’s credit file.


A way forward

To stop the above issues causing problems for consumers, BNPL needs to be regulated, and as soon as possible. It is vital that when the FCA regulates BNPL, it creates a level playing field with other credit products, like credit cards, store cards, and personal loans.

This means that the rules ensuring good customer outcomes apply on the same basis to BNPL, as to other financial products. It is then for the customer to decide which product best suits them.

I shall, of course, be making this point through the Treasury’s consultation process because borrowing is borrowing, whatever product you use, and if not done properly, problem debt is problem debt. I will also raise the issue of temporary regulation or special powers that allow the FCA to intervene more quickly on unregulated products. To me, it makes absolutely no sense that customers need to wait years for regulation to catch up with a product already used by millions.

When regulation caught up with pay-day lending, many consumers had already got into trouble when they could have been protected from doing so.  Whilst I am not comparing BNPL to pay-day, we ought to learn the lesson from history that if you want the regulator to support the good, and remove the bad, you need a regime that allows regulators to move fast and be nimble. If they are stopped from doing that, experience shows that widespread customer detriment is eminently possible.