On 17 October 2024, the highly anticipated consultation paper on ‘Buy-Now, Pay-Later’ (BNPL) regulation and draft legislation was published by HM Treasury. The draft legislation has the effect of bringing BNPL products within regulatory scope.

Currently, BNPL products offered by platforms such as Klarna fall outside of regulations, which has been identified as a risk since the Woolard Review was published in 2021. The consultation paper invites responses on the draft legislation, in light of the risks identified by the Woolard Review. 

The consultation paper emphasises the importance of preventing consumer harm, stating that the government’s proposal will “ensure consumers receive clearer information and…have access to strong protections”. 

The use of BNPL products has increased rapidly since 2021, with market leader Klarna taking steps recently to expand into physical stores and small businesses. However, the concerns raised by the Woolard Review are still prominent, with critics arguing that BNPL products have the potential to create high levels of indebtedness due to the lack of affordability assessments undertaken. 

The consultation paper highlights that 44% of the most frequent users of BNPL were over-indebted. Yet the paper makes clear that they want people to continue to have wide access to these products, perhaps acknowledging their increase in popularity. 

What is the UK Government proposing? 

The government’s proposal focuses on an information requirements regime, complemented by the Consumer Duty. One of the government’s suggestions is to require authorisation for firms who wish to offer BNPL products. This would in turn allow the FCA to supervise these firms and set appropriate rules. This is key as the current regulatory framework, including the Consumer Credit Act 1974 (CCA), is arguably too outdated to effectively regulate BNPL products. 

Nevertheless, firms will still be subject to some provisions of the CCA, including section 75 CCA which offers key consumer protection. Section 75 imposes joint and several liability on creditors for breaches of contract or misrepresentation, and it applies to purchases valued between £100 and £30,000. It is critical that such a protection extends to BNPL products as the framework develops and calcifies. 

Other regulatory controls not covered in the draft legislation include Financial Ombudsman Service controls and decisions, responsible lending and credit reporting. 

Next steps 

The current consultation period is open until 29 November 2024, after which the government will publish its final policy position. 

It will be interesting to see if the consultation responses mirror those issues raised in the Woolard Review, or if the rise in BNPL firms like Klarna has lessened general concerns surrounding consumer risk. 

Written by Madeleine Chambers, trainee solicitor, Burges Salmon