Regulations for the BNPL Lenders
Based on where you are in the world, government regulations specific to BNPL companies vary. Click on your location below to see what the current regulations are in your part of the world.
It is unclear how buy now, pay later fits into U.S. regulations because the companies that offer these services do not have bank charters, some do not charge interest and laws vary by state. However, some experts expect the sector to come under more scrutiny during the Biden administration. While the BNPL space isn’t formally regulated by governing agencies in the United States, there have been a few enforcement actions against these organizations.
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.
While the BNPL market operates under an exemption from regulations for consumer credit lending currently, the UK government recently announced that interest-free buy-now-pay-later (BNPL) credit agreements will be regulated by the FCA.
The announcement comes as a result of a review of the unsecured credit market, led by Christopher Woolard, former interim Chief Executive of the Financial Conduct Authority (FCA), which urgently recommends regulating all BNPL products. The Woolard Review sets out 26 recommendations for the FCA, UK government, and other bodies to reform the unsecured credit market. The recommendations take into account the impact of the COVID-19 pandemic, changing business models, and new developments in unregulated BNPL unsecured lending.
This will include firms being asked to undertake more comprehensive affordability checks before lending, and ensuring customers are treated fairly, “particularly those who are vulnerable or struggling with repayments”.
In July 2021, the FCA will publish its 2021/22 Business Plan, which will further detail the FCA’s response to the Review.
Australia & New Zealand Regulations
Even though Australia's most mature BNPL company was launched over seven years ago, Australia and New Zealand have no BNPL laws and no regulation. However, the Australian Finance Industry Association (AFIA), an industry trade group, released the first version of self-regulations on the Buy Now Pay Later industry on March 1st, 2021. The full text of the document is here.
“The commitments in this Code are intended to be best practice, and we will monitor domestic and international developments to ensure they remain best practice. The Code does not supersede any upcoming regulatory requirements. Rather it will operate alongside, and is subject to, existing laws and regulations and does not limit your rights under such laws and regulations.”
A few provision in the code include:
- For purchases of less than under $2,000, the code will not require a credit check, but it commits providers to steps including verifing a customer’s identity, and requiring customers make the first instalment payment at the time of the purchase.
- For transactions between $2,000 and $15,000 BNPL firms are committing to using at least some external data, such as a bank statement, in their assessments.
- For transactions between $15,000 and $30,000 there is a commitment to use two external data sources.
- The code also says BNPL customers must be adults, and it rules out BNPL products being used to pay for gambling or the purchase of guns.