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In December 2021, the CFPB opened an inquiry to BNPL credit, requesting information on the risks and benefits from Affirm, Afterpay, Klarna, PayPal, and Zip. In September 2022, the CFPB published a report that details the finding of their report, including three areas of consumer risk from BNPL products: discrete consumer harms, data harvesting, and borrower overextension.
The CFPB will identify potential interpretive guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later lenders adhere to many of the baseline protections that Congress has already established for credit cards. As part of this review, the agency will also ensure BNPL lenders, just like credit card companies, are subject to appropriate supervisory examinations.
The FTC also called out BNPL lenders specifically, publishing a blog post titled "Buy now, pay later – and comply with the FTC Act immediately" in which they warn BNPL lenders—and those involved in the BNPL ecosystem, such as marketers—to comply with existing consumer protection laws.
For more insights on what's next for BNPL compliance programs, check out this article.
In July 2021, the FCA published its 2021/22 Business Plan, which stated “Deferred Payment Credit: The Woolard Review recommended bringing the currently exempt Buy Now Pay Later sector (now referred to as ‘Deferred Payment Credit’) into regulation. Subject to the Treasury’s consultation on the scope of the regime, we plan to consult on new rules in 2022 and are developing our approach to the authorization gateway and supervision.”
In June 2022, the FCA announced plans to strengthen regulation around interest-free BNPL credit agreements, which includes requiring lenders to carry out affordability checks to ensure loans are affordable to customers, and rules will be amended to make sure advertisements are “fair, clear, and not misleading.”
The government plans on publishing a consultation on draft legislation by the end of 2022 and aims to lay secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.
Then, in August 2022, the FCA sent out a letter to BNPL lenders and merchants reminding them that they must meet regulatory obligations when promoting those agreements, or risk committing a criminal offense, and said “We will actively monitor the market to assess compliance. If we identify non-compliant financial promotions, we will consider what further criminal and civil enforcement action we may need to take to protect consumers and act against firms and individuals that don’t meet our standard.”
At the European level, several policymakers believe that BNPL providers fall short of consumer ethics principles. Secretary-General of the Swedish Consumers' Association, the European consumer rights group BEUC, Austrian consumer organization Arbeiterkammer are a few entities that questioned the way BNPL companies meet their liabilities in terms of obligations against the law. The EU’s Consumer Credit Directive rules of which are currently under review by the Commission, and adoption of the consumer credit review is planned for the second quarter of 2021.
Based on ASIC data, the number of transactions increased in the country from 1.9 million in June 2018 to 3.4 million in June 2019, representing a surge of 75%. What’s more, the number of BNPL accounts had climbed to 6.1 million by June 2019, representing 30% of the nation's adult population, yet 21% of BNPL users missed a payment in the last 12 months.
BNPL providers enjoyed a relaxed regime in Australia, as the provisions of the Australian National Consumer Credit Protection Act of 2009 do not apply to certain types of loans, including short-term interest-free credits. The industry has eventually adopted a self-regulatory approach. The Australian Finance Industry Association (AFIA) announced on the 1st of March 2021 that its Code of Practice for the BNPL sector has come into effect. According to their statement, ‘AFIA’s BNPL Code goes above and beyond the law in Australia, setting best practice standards for the sector and strengthening consumer protections. It does this while preserving customer choice to make purchases and payments in a way that suits their needs and preferences.’
BNPL providers that are compliant with this Code must carry out assessments before a customer can make a purchase and conduct additional checks to prevent consumers from stretching their arm further than their sleeve will reach. BNPL disputes under the code will be managed by the Australian Financial Complaints Authority, where a designated committee will have the power to publicly denounce companies that provide loans services outside the Code’s standards.
The current regime allows BNPL payment options to be quick, easy and available to all consumers, regardless of credit history. At the same time, the sector is more vulnerable to fraud and does not offer consumers the same protections as those available to users of traditional credit services. On 23 June 2021, the Minister for Finance published the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 (the Bill). The Bill, if enacted in its current form, will bring the BNPL sector squarely within the scope of Irish financial regulation.
The Bill extends the definition of "credit" in the 1997 Act to include BNPL arrangements. The extended definitions will bring all BNPL providers within the scope of the regulatory regime for Retail Credit Firms, even those that provide credit indirectly via retailers. Retail Credit Firms are required to make an application for authorization to the CBI. Applicants must demonstrate that they are able to meet the applicable authorization requirements and standards, including in relation to governance and management, staffing, credit policy, IT systems, outsourcing and ownership.
Unregulated firms carrying on BNPL should consider the terms of the Bill and start preparing their applications for CBI authorization. Firms will have only three months from the coming into operation of the legislation within which to make their formal application to the CBI.
Sweden passed the Swedish Payment Services Act in 2020, aimed to discourage online shoppers from paying with credit—including BNPL products. The Act requires merchants to present the payment methods that do not put the consumer into debt and forbids them from pre-selecting paying by invoice or installment loans in their online checkout.
At the beginning of 2021, some tensions occurred in California. The California Department for Business Oversight (DBO), a division of the state government that regulates financial services, has taken over several cases focused on BNPL services. These cases referred back to the California Civil Code which defines a loan as “a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which they borrowed.”
Back in 2020, the California Department of Financial Protection and Innovation (then known as the Dept for Business Oversight or “DBO”) took several actions against BNPL companies for issuing illegal loans, referring back to the California Civil Code which defines a loan as “a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which they borrowed.”
As part of this, the DFPI concluded that point-of-sale (buy-now-pay-later) financing transactions may be deemed loans when:
- The consumer, merchant, and third-party financer treat the transactions like loans, despite contradictory language in the applicable contracts;
- The relationship between merchant and third-party financer is extensive;
- The role of the third-party financer and all financing terms are not clearly disclosed to the consumer; and
- The financing transaction is not otherwise regulated.
In November of 2021, the Financial Consumer Agency of Canada (FCAC) published a study on BNPL services with the goal of broadening the Agency’s understanding of the BNPL market in Canada, from the perspective of Canadian consumers.
Among other things, the study found that BNPL consumers aged 18 to 34 are most likely to use an online BNPL service, whereas users 65 and over appear more likely to use a credit card-based service. The most common reasons consumers use BNPL services were to help with budgeting, to afford a purchase that they would not be able to afford by paying all upfront, and to avoid interest and fees.
The Monetary Authority of Singapore (MAS) is assessing if a regulatory framework is needed to guide BNPL payment options as they become more widely used, including the adoption of fair dealing practices by BNPL providers.
BNPL schemes currently “do not pose a significant risk to household indebtedness” in Singapore given how they are not widely used compared with other payment methods, but the increase in regulatory attention in countries like the U.K. and the United States is anticipating increased usage of BNPL products in the country.
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