A review of developments in the unsecured credit market for the UK Financial Conduct Authority has called for new credit products, including buy now pay later, “to be brought within the regulatory framework as a matter of urgency.”
In what may be a pointer to future developments locally, the FCA has supported the review recommendations.
The Woolard Review said: “While the emergence of unregulated BNPL products has provided a meaningful alternative to payday loans and other forms of credit, BNPL also represents a significant potential consumer harm.
“Regulatory oversight is appropriate to ensure that that product develops in a way which is beneficial to the end consumer.”
It said potential harms include a lack of understanding among many consumers that BNPL is a credit product, lack of access to an ombudsman service, a lack of protections for vulnerable consumers and poor credit assessment processes.
The arrears levels of some BNPL providers can be quite high and for those that charge late payment fees the revenue from such fees can make up a significant portion of the firm’s overall revenue.
There is also a lack of transparency, with most BNPL providers not reporting to credit bureaus. “This means regulated credit providers may not have a complete view of a consumer’s financial position when assessing affordability,” the review said.
The review said the focus of regulation should be on how consumers use credit, such as dealing with problems arising from the incidence of repeat lending and persistent debt.
Credit card issuers are required to identify customers at risk if financial difficulty as a result of persistent credit card debt and take appropriate steps. The review said similar rules could apply to BNPL providers.
“Affordability assessments are an important way to reduce predictable harm. It is essential BNPL providers properly consider affordability, particularly as they may not have visibility of missed payments with other providers,” the review said.
It also said rules around forbearance, to deal with unforeseen changes in circumstances, are a critical way to reduce harm.
In response to the review, the FCA said: “The board agrees that there is a strong and pressing case to bring buy now pay later business into regulation. Regulation should be consistent and the review shows how we can ensure high standards in consumer credit regardless of the form of credit.”