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Monday, February 27, 2023

UK moves on BNPL regulations

The United Kingdom is moving ahead with plans to regulate the fast-growing buy now, pay later (BNPl) market. Draft legislation published by the UK government on Feb. 14, 2023, would render BNPL agreements subject to rules established by the Financial Conduct Authority, a non-governmental body that regulates financial services firms there.

Under a game plan set out by HM Treasury, the UK economic and finance ministry, BNPL service providers will be required to perform affordability checks, determining if a customer has the means to repay the money. Rules around marketing also will be amended to ensure BNPL advertisements are fair, clear and not misleading. Lenders offering BNPL products first will need approval from the FCA, under the proposed legislation, and borrowers will have the right to file complaints with the government's Financial Ombudsman Service.

The UK government has been working up a BNPL regulatory scheme for about two years and published a "consultation" paper last summer indicating how regulation might play out. As reported recently by The Green Sheet (www.greensheet.com/breakingnews.php?article_id=2817) the FCA has assumed a get-tough approach to supervising BNPL firms already, taking many to task for promotions deemed unclear, unfair and/or misleading.

The just-published draft legislation differs from what was proposed last year in one major way, explained Rachel Preston, a financial services expert at the London-based law firm Pinsent Masons. "The previous proposal to create different sets of rules depending on whether [the product] was sold in-person, online or at a distance would have undoubtedly resulted in operation complexities, compliance issues and ultimately a greater risk of customer confusion," she said.

Plans are for a two-year transition period once the legislation is approved. During that time, firms already offering BNPL will receive temporary permissions to continue.

"The government is ambitious that the legislation for the regulation of BNPL products will be laid before Parliament during 2023," the international law firm Sidley Austin stated in a blog post.

Regulatory 'guidance' due for BNPL in U.S.

BNPL is a loan product that has been gaining favor as an alternative to credit and debit card purchases because it offers an interest-free option provided the customer pays off the loan on time over a short period of time (typically 30 days).

The five largest providers of BNPL loans—Affirm, Afterpay, Klarna, PayPal and Zip—combined originated 180 million BNPL transactions worth $24.2 billion in 2021, according to the Consumer Financial Protection Bureau. Researchers at Research and Markets estimated that the global BNPL market is growing at a compound annual rate of 28 percent.

Consumer Reports found that in the first seven months of 2022 the number of Americans using BNPL at least once had jumped from 18 percent to 28 percent.

But here's the downside: some consumers are racking up too much debt with BNPL. Ten percent of consumers surveyed by Consumer Reports, for example, reported they were paying off four or more BNPL purchases; 18 percent of those respondents reported missing at least one scheduled payment.

A CFPB analysis found charge offs of BNPL loans jumped to 3.8 percent in 2021, from 2.9 percent the year before. During that same period, credit card charge-off rates for the 100 largest banks fell from 3.59 percent to 1.56 percent, according to the Federal Reserve Board.

The CFPB has said it has concerns about the risk posed to consumers by BNPL. And it has said "interpretive guidance" would be forthcoming. That guidance is expected to spell out how regulations that apply to credit card companies also apply to BNPL firms. CFPB Director Rohit Chopra has also suggested routine examinations of BNPL companies, similar to the examinations performed on financial institutions, could be coming. end of article

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