FCA calls for stricter buy now pay later regulations “to protect consumers”

The buy now pay later sector may have had its best year ever in 2020, but now the UK’s top financial watchdog is calling for stricter rules “to protect consumers”.

Following the close of the Woolard Review, the Financial Conduct Authority (FCA) is urging lawmakers to introduce new regulations to ensure that people using BNPL services do not fall into serious debt.

“New ways of borrowing and the impact of the pandemic are changing the market, with billions of pounds now in unregulated transactions and millions of consumers at greater risk of financial difficulty,” said Christopher Woolard, chair of the review.

“Changes are urgently needed to bring BNPL into regulation to protect consumers, to ensure that there is secure provision of debt advice to help all those who may need it, and to maintain a sustained regulatory response to the pandemic.”

The review makes 26 recommendations, including new regulations, calls for new debt advice services, calls for the FCA to collaborate with the government and Bank of England to reform the regulation of credit unions and community development finance institutions, and more alternatives to high-cost credits.

The City watchdog’s call to toughen up the regulations comes as the BNPL sector is set for significant growth.

A Bank of America survey predicted in December that apps such as Affirm, Afterpay and Klarna were poised to grow between ten and 15 times by 2025 “to eventually process between $650bn and $1trn in transactions.”

The sentiment seemed to be confirmed further in January when Affirm began trading on the Nasdaq, with its shares jumping by more than 100% in the first day.

The company went public just months after it recorded one of the ten biggest capital investments recorded in the FinTech industry in 2020 by raising a $500m Series G round in September.

Other significant success stories include Swedish-based Klarna briefly becoming Europe’s most valuable privately owned FinTech company after securing a $10.65bn valuation on the back of closing a $650m round in September 2020.

Checkout.com later took the crown after closing a $450m Series C funding round at a $15bn valuation in January.

The use of BNPL products nearly quadrupled in 2020 and is now at £2.7bn, with five million people using these products since the beginning of the coronavirus pandemic, according to the FCA.

The regulator also estimated that one in ten customers of major banks using BNPL services were already in arrears.

“Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses,” said Charles Randell, chair at the FCA.

“While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households. Many people have been able to reduce their debts, but some of the poorest in our society have exhausted any savings or run up more debts.

“All the authorities which cover debt and debt advice must act together systematically to prevent problem debt and to help people get out of a spiral of debt through properly funded debt advice.

“Regulation should be consistent and the review shows how we can ensure high standards in consumer credit regardless of the form of credit.”

Some BNPL businesses have welcomed the FCA’s call for stricter regulations.

“Zilch supports and welcomes the calls for regulation across the industry,” said Philip Belamant, CEO and founder of Zilch, the BNPL company that raised $30m in December.

“Responsibility must be at the heart of lending, with no exceptions. Zilch was born with regulation at its core, it has been part of our DNA from the start and that has resulted in us being the first fully FCA regulated [BNPL] provider in the UK. To achieve this, Zilch entered the FCA’s innovative Regulatory Sandbox Programme to work hand in hand with the regulator on its unique consumer-focused approach to buy now pay later.”

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