Australia, the European Union, the United Kingdom and the US are looking at regulating the buy now, pay later (BNPL) sector. Last year, all three entities announced initiatives that sought to bring these mostly unregulated products into a legal framework that could offer more protection to consumers.
Six months into 2022, regulators are still deciding what the next steps are. During these six months, some BNPL providers have taken this issue into their own hands and have decided to voluntarily increase disclosures, transparency or even start sharing information with credit agencies to allow consumers to build credit history. This is, for example, the case of Klarna, which since June 1 is sharing BNPL purchases made in the U.K. with two credit agencies.
But in recent weeks, policymakers in some of these Western countries have resumed their efforts to regulate this sector. Unlike in 2021, when the U.S. and the U.K. seemed to lead a regulatory push, Australia and the European Union may be now the countries taken more steps into designing a new regulatory framework.
Last week, Stephen Jones, the Australian financial service minister, said that the government will push ahead with plans to bring BNPL under credit laws. BNPL providers are currently exempt from laws designed to protect borrowers who use products such as credit cards or personal loans.
“Products like Zip and Afterpay, I think they’re a good innovation in the credit market,” Jones said. “Can we stop having an argument about whether [they’re] credit or not? It really is a dead-end street. Let’s start working on regulating [them] within the credit space. We welcome the fact that they’ve introduced a code, [and will] move to legislate it and fill any gaps.”
The EU bloc is taking timid but rapid steps to regulate BNPL. Unlike other countries that may be seeking comprehensive BNPL regulation, EU regulators are amending existing regulations to accommodate BNPL products and offer more protection to consumers.
The European Commission is expanding the scope of its Consumer Credit Directive to include new types of loans, and BNPL products are among them. If these new rules are approved, BNPL providers will need to observe more transparency and disclosure requirements, but no obligations on the types of fees or the amount of the loans will be imposed. Last Thursday (June 9), the EU Council adopted a few amendments to the text that may be less restrictive for BNPL providers than the original text. This week, the EU parliament is expected to vote on the proposal at the committee level. If the EU Council and the EU Parliament reach an agreement the new rules could be approved in the last plenary session before the summer break at the end of July.
BNPL products in the U.K. are unregulated because they benefit from an exemption in the law for short-term credit-free credits. In 2021, the Treasury launched a consultation on BNPL with the clear intention of bringing these products into a regulated legal framework. The consultation closed on Jan. 6, but neither the results nor a plan of action have yet been published.
This consultation sought to gather information from relevant stakeholders and the public, not to decide whether to regulate or not, and although this is likely, according to the different stakeholders, it would be the Financial Conduct Authority (FCA), and not the Treasury, that would design the new rules. However, since the FCA cannot run its own consultation until it has the go-ahead from the Treasury, any regulatory framework seems unlikely before 2023.
The Consumer Financial Protection Bureau (CFPB) opened an inquiry into buy now, pay later (BNPL) on Dec. 16, 2021. As part of that inquiry, the CFPB asked for five key BNPL providers to provide data intended to clarify the risks and benefits of this product to consumers. The agency also requested feedback from the public on this issue. Deadlines to submit information were March 1 and 25 respectively, and now the agency needs to decide what’s next.
In one of the submissions, 21 attorneys general urged the CFPB to analyze the BNPL market and to use its rulemaking powers to increase fee transparency, disclosure, credit reporting, dispute resolution mechanisms and the use of consumer data among other things.
Yet, despite the interest from the agency in regulating this space, CFPB Director Rohit Chopra didn’t include the BNPL sector among his priorities when he testified before the House and the Senate. He mostly focused his attention on promoting open banking, imposing limits on “junk fees” and increasing scrutiny of repeat offenders.