Buy now, pay later facing UK crackdown

Tighter regulation of the booming sector is urged by a British report worried about ‘significant potential consumer harm’.

A UK review has found an “urgent need” to regulate the buy now, pay later sector. Picture: AAP

UK regulators are set to crack down on the burgeoning buy now, pay later sector following a review of the unsecured credit market that found an “urgent need” to regulate the fast-growing platforms.

The Woolard Review, released in the UK, found that BNPL represents “a significant potential consumer harm”, and recommended amending legislation “as soon as possible” to ensure tighter regulation of the sector.

“BNPL products which are currently exempt from regulation should be brought within the regulatory perimeter as a matter of urgency,” Christopher Woolard, the chair of the review, said.

“The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm,” he warned.

The review comes after Australia’s corporate regulator in November published its own landmark report into the fast-growing BNPL sector. It also precedes an industry-led code of practice for Australia’s BNPL providers, expected to come into effect from March this year.

The use of BNPL products such as Afterpay, Zip and Klarna nearly quadrupled in the UK in 2020, with the value of transactions now sitting at £2.7bn, according to the UK review. Since the beginning of the coronavirus pandemic, five million Britons had used the products, the review found.

The review also found that more than one in ten customers of a major bank using BNPL were already in arrears. Regulation would protect people who use the delayed payment products and make the market sustainable, Mr Woolard said.

Shares in ASX-listed Afterpay dropped more that 2 per cent shortly after the market open before recovering in midmorning trade to be slightly higher at $147. Zip shares dropped a similar amount before paring some of the losses.

Afterpay, which trades under the name Clearpay in the UK, said it welcomed the review and its recommendations and would work with regulators to build on consumer protections.

“We welcome today’s recommendations and look forward to working with the FCA, the government and stakeholders to build on the consumer protections we already provide to create the applicable regulation for the sector,” Clearpay executive vice-president for public policy Damian Kassabgi said.

“It has always been Clearpay’s view that consumers will be best served by products designed with strong safeguards and appropriate industry regulation with oversight from the FCA.

“We are pleased that many of the suggestions we put forward in our submission to the Woolard review have been acknowledged and that the review has recognised the diverse nature of the industry,” he said.

Zip co-founder Peter Gray also welcomed the recommendations and said the review’s findings were a positive step for the UK industry.

“While it remains to be seen exactly what regulation will look like, we are working through the details of the review.

“As a global business, Zip is comfortable operating in a regulated environment and has always had a strong focus on responsibility, affordability, fairness and financial wellbeing,” he said.

“We will work collaboratively with the FCA and the industry to build on the customer protections we already have in place, while continuing to develop products that offer a positive alternative to high cost credit for our customers,” Mr Gray said.

The likelihood of tighter regulations in the UK is a headwind for the sector’s growth, analysts warned.

“While we see regulation as a barrier to entry, we think that at such an early stage of the sector‘s development in the UK it has the potential to slow the growth/size of the sector vs existing expectations,” UBS analysts warned as they pointed to FCA concerns around the lack of consistency in how BNPL services are marketed to retailers and consumers

BNPL services are marketed to retailers on the basis that consumers spend more but are presented to consumers as a free budgeting tool to consumers.

“In our view, we see a risk that ‘fit for purpose’ regulation could give retailers the option to present consumers with the true cost of their payment choice through the ability to recover merchant fees (currently prohibited by BNPL services contractually via ’no surcharge’ clauses),” they warned.

Citi analyst Siraj Ahmed said the regulation was a headwind “but may not be a knockout blow”.

“The need for additional information from consumers (such as affordability assessments) is a risk to the take-up and use of BNPL.

“The report also recommended that the FCA should also look at addressing how credit information reporting works with BNPLs – reporting of BNPL use to credit agencies could also negatively impact consumer use of BNPL,” he told clients.

The Woolard Review and impending regulation comes months after Australia’s corporate regulator published its own landmark report into the fast-growing BNPL sector.

In November, the Australian Securities and Investments Commission’s review found that one-in-five users had missed payments, and a similar proportion had cut back on essentials like meals to make their payments on time.

Of the consumers who cut back or went without essentials in the 2019 financial year, the regulator found that almost half were between 18-29 years old.

Despite this, ASIC made no recommendations for tighter consumer protections, instead pointing to work on an industry code of conduct, and the introduction of design and distribution obligations from October 2021 to force companies to issue products in line with consumer needs.

ASIC Commissioner Sean Hughes in late 2020 said future regulation of the BNPL sector was a matter for government.

The industry-led code of practice for BNPL providers is expected to be effective from March this year.