Over the years, I have seen a range of significant industry transformations, many of which have been driven by regulatory activity. One example of this includes consumer credit firms being brought into the FCA’s regulatory perimeter.
In spite of the current uncertainty about when the regulation of Buy Now Pay Later (BNPL) firms might take place, the legislative changes envisaged by the Treasury to regulate such firms are likely to arrive sooner or later. When this happens, it will be another example of the power of regulation to drive wider industry change.
BNPL regulation has been on the cards for some time
It’s been sometime since the FCA first started to pay attention to BNPL firms. In July 2019, the FCA published the finalised rules related to BNPL offers. These early steps aimed to minimise the risk of harm from BNPL offers providing insufficient information to consumers, as well as the backdating of interest on repaid amounts.
Considering the recent growth of the BNPL market and the disruptive circumstances caused by the Covid pandemic, the FCA took further steps to review the contractual terms of certain firms on the basis of those failing to meet the fairness and transparency of terms standards required under the Consumer Rights Act. It has also published a ‘Dear CEO’ letter aimed at tackling malpractices involving BNPL promotions.
The Treasury consultation is now preparing the basis for a new era as, save for a few exceptions, BNPL credit arrangements will be brought into the FCA’s regulatory perimeter. Once this happens, we should expect intense regulatory activity in the form of secondary legislation to be published by the FCA, covering authorisation requirements, conduct obligations and rules addressing the BNPL nuances concerning consumer credit compliance.
Although the regulatory journey, so far, has not drastically influenced the emergence or discontinuity of BNPL firms, the current work led by the Treasury and the associated next steps (in the form of FCA regulation) will be key to defining industry direction.
Below are a couple of thoughts on what could happen next:
Scenario 1: regulatory certainty incentivising market entry
From my experience, one thing that financial services firms appreciate is regulatory certainty. Certainty enables better-informed strategies, risk appetites and business decisions.
The Second Payment Services Directive (PSD2) is a great example of the benefits of regulatory certainty. The regime not only provided stakeholders with clarification on the regulatory position applicable to emerging business models, for example account information and payment initiation service providers, but also enhanced certainty by narrowing down the range of exemptions available, such as limited network and certain payment transactions carried out through a commercial agent.
Scenario 2: levelling up the playing field
Regulation can also create barriers to entry for market players unprepared to meet the minimum standards of business conduct. This also applies to existing players who may decide to exit the market as a result of an increased level of regulatory obligation. Where regulation sets out higher standards of compliance aimed at mitigating the risk of consumer harm, firms without robust and sustainable business models may be pushed out of the financial services industry.
I recall that, in 2014, prior to the entry into force of tougher rules applicable to payday lenders, there was wide availability of payday loan shops on high streets across the country. This drastically changed once, for instance, the cap on payday loans was introduced.
Although timeframes for BNPL regulation are uncertain, it does not mean that BNPL firms should operate in isolation to the wider regulated financial services sector or not consider the broader direction of travel of the FCA
I have previously explored how regulatory events like the New Consumer Duty trigger important considerations and adjustments around culture in payments firms. From my point of view, BNPL firms should immediately consider the implication of their activity upon regulated services provided by other firms, since the Consumer Duty applies to unregulated activities which are necessary for the provision of a regulated activity. As a consequence, there may be instances where the BNPL services come into the scope of the Consumer Duty as ‘ancillary products’.
Where BNPL is a driver for merchants to accept certain means of payment, or even for end customers to use a particular payment instrument, the role of BNPL in the context of the FCA Consumer Duty should not be underestimated.
If in scope, BNPL firms, whether established or new, need to be immediately prepared to demonstrate good customer outcomes from their lending activities, no matter how innovative or customer-centric they already are. In other words, firms who want to remain in the market, must consider the seismic shift that the combination of Consumer Duty and BNPL regulation will undoubtably bring. This includes cultural shifts to focus more on delivering and evidencing good customer outcomes and anticipation of the regulatory scrutiny that is no doubt to come.
If you have any questions or would like to explore this topic further, please don’t hesitate to get in touch.