Innovate Finance response to HM Treasury Regulation of Buy-Now Pay-Later Consultation

10th January 2022 | Blogs , Consultation

About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.

The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception in the era following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses are able to access finance.

Introduction

Innovate Finance is delighted to respond to this consultation from HM Treasury.

As the industry body representing the FinTech community in the UK, we strongly support a regulatory framework that protects consumers, builds confidence, and facilitates a dynamic and growing market.

Following the publication of the Woolard Review, Innovate Finance has convened members from across the FinTech community, including Buy Now, Pay Later (BNPL) providers as well as other firms operating in the consumer credit and credit decisioning market. This group has been exploring the issues raised by the Woolard review from a UK FinTech ecosystem perspective, to identify an approach that enables technology solutions and innovation to deliver good outcomes for consumers.

BNPL is a broad term for a variety of service and consumer offerings. The common element is ‘deferred payment’ and a principle of interest-free credit. The Woolard Review provides a perspective that BNPL products have heavy use in fashion and footwear retail. It is true that these types of retailers and their core demographic have proved to be early adopters of the product. However, deferred payment products are increasingly used by a broad range of retailers and service providers including veterinarians, pharmacies, education, automotive, sports and gym memberships, homeware and department stores, supermarkets, travel companies, white goods providers and many others. In turn, their popularity amongst a broader demographic is also increasing.

BNPL is one of the fastest growing examples of FinTech innovation across the world. It has responded to a significant shift to online retailing and a desire from consumers for new ways of budgeting for purchases. This has accelerated with the Covid pandemic, where in the UK online sales went from 19% of total retail sales on the eve of the pandemic to 38% in January 2021 (settling at around 26% in autumn 2021).

BNPL has grown to around 5% of payments in the online e-commerce market. The UK population is very active in online commerce and are open to adopting new payment methods and technologies. The simple and clear offering of BNPL products has proved popular with both merchants and consumers, while providers have sought to deliver experiences that balance convenience with understanding in a responsible way. Despite this, it is recognised that this growth has occurred outside of the regulatory perimeter and both Innovate Finance and many of its members have been vocal in their support for sensible, proportionate regulation of the sector. Regulation is necessary to promote trust and certainty for BNPL providers and retailers, and provide clear, consistent protection for consumers.

In this response, Innovate Finance focuses on how far the proposals in the consultation document achieve HM Treasury’s four main objectives that it set out for the regulation of BNPL:

BNPL activities should be subject to an intervention which is proportionate to the level of risk that they present and is not so burdensome that it inhibits the product being offered or reduces consumer choice;
Consumers should be adequately and fairly protected from detriment, and can access dispute resolution regarding the conduct of lenders;
Regulation for BNPL should not adversely impact competition and innovation across the wider consumer credit and payments markets;
Any burden on merchants offering BNPL as a payment option would be proportionate and manageable and should not disadvantage small and medium sized enterprises (SMEs) over larger merchants.

Innovate Finance would also like to refer to the overarching aims for evolving regulation of the FinTech sector as detailed in the Kalifa Review of UK FinTech, namely that the UK government must continue to support innovation in financial services and help drive competition for the benefit of consumers. It is critical that these aims are maintained and borne closely in mind by HM Treasury as it designs a regulatory framework for BNPL.

Innovate Finance’s overarching comment on this consultation is that it is clear that HM Treasury has put considerable effort into ensuring that the regime for BNPL would be proportionate and not impact competition and innovation.

Summary

BNPL is an example of how new innovative products are coming forward that meet people's needs, but the regulatory system is slow to catch up and current consumer protection regulations are not as innovative nor suited to the digital age. There is an opportunity to develop a new approach to consumer regulation that provides better consumer outcomes and supports innovation.

Desired outcomes

There are three main outcomes to be achieved through regulatory approaches:

Information – so the consumer knows what they are doing. This does not necessarily mean the highly prescriptive disclosure required under the Consumer Credit Act. It needs to be simple and clear and understandable.
Protection if something goes wrong – including ability to take complaints to the Financial Ombudsman service (FOS) and the same protection you get with credit card purchases over £100, where the credit provider is equally responsible alongside the retailer.
Protection for consumers who have less financial resilience, who may be at risk of unaffordable debt. This includes timely, appropriate affordability assessments (that in turn do not unfairly penalise consumers); appropriate interventions to support vulnerable consumers; tracking their aggregate credit across different providers; and better credit information sharing across the market.

These need to be achieved in ways that enable consumers to continue to benefit from choice and access to affordable credit.

Scope

All interest-free credit currently outside the regulatory perimeter should be covered by the regulation. Short-term interest-free credit should not be excluded; any exclusion will create inconsistent consumer expectations and protection, potential loopholes for less scrupulous new services, and an unlevel playing field in the market. In practical terms, a legal distinction in definitions can not be drawn between BNPL and short-term interest-free credit.

An exception could perhaps be made for very small scale providers who deliver short-term interest-free products which are socially useful and highly unlikely to cause consumer harm (e.g. a size threshold exempting those with a very small loan book or turnover).

Regulatory approach

The Consumer Credit Act of 1974 (CCA) is not fit for purpose in a digital age. The provisions of Section 75 of the CCA should form part of the BNPL regulatory rules but the rest of the CCA is inappropriate and would not provide good outcomes for consumers.

In terms of information, contractual agreements, creditworthiness, forbearance and vulnerable consumers, a bespoke set of FCA rules should be developed and applied. Wherever possible these should be outcome-focused and should take account of standards to be introduced as part of the Consumer Duty proposals.

Wider reforms needed

Finally, BNPL shines a light on a number of wider reforms needed in the consumer credit market:

The CCA needs wholesale review and reform to deliver good outcomes. The approach to BNPL provides a good pilot for what future consumer credit regulation could look like.
The credit information market needs reform. In its current form, it does not serve consumers or retailers of financial providers well. Consumers may be unfairly excluded from credit which they can afford, particularly those with thin files; retailers and credit providers cannot access proportionate credit assessments for more frequent small purchases; and currently use of BNPL can affect credit scores in a disproportionate way. The current FCA market study is critical. In addition, government and the FCA should encourage rapid and inclusive discussion and solutions to develop new Credit Reference Agency (CRA) categories for BNPL; for BNPL providers to agree how they will share information to enable an aggregate BNPL credit picture of individual consumers; and further development of innovative credit information and affordability assessment solutions based on open banking and open finance.
Reform of the Financial Ombudsman Service (FOS) is needed, particularly as new services need to come within its remit. The fee structure needs to be revised; claims management company activities should be further reviewed; and above all processes are needed to ensure consistent application and interpretation of regulations by the FCA and FOS.

These wider points are expanded on in more detail below, followed by responses to the specific questions raised in the consultation document.

Regulatory observations

These wider points are expanded on in more detail below, followed by responses to the specific questions raised in the consultation document.

Innovate Finance agrees with the wider industry perspective that the CCA 1974 requires comprehensive reform and does not work well in a digital environment. In seeking to develop a proportionate approach for the regulation of BNPL products, HMT has an opportunity to implement a regime that encourages consumers to engage with and understand the products they use, while focussing on providing the right outcomes for lenders, retailers and consumers in the digital age.

The HM Treasury proposal to apply some CCA rules to BNPL but not others therefore makes some sense and could provide a practical bespoke approach to regulating BNPL.

However, there may be an alternative. In reading through the consultation and addressing the questions laid out, it has become clear to Innovate Finance that it would be complicated and time-consuming to apply select parts of the CCA to BNPL in a way that would meet all of HM Treasury’s four objectives, above. CCA rules were simply not designed with today’s e-commerce and digital lending market in mind (and BNPL specifically), and so it seems very difficult to adapt the CCA to the current need to regulate BNPL. The complexity of CCA regulation favours incumbents and established firms and stifles innovation.

The approach taken for Peer 2 Peer lending may also be relevant, where there is a single set of FCA rules in one place rather than spread across a number of subordinate regulations.

Innovate Finance would suggest that a better approach may be to look to adapt FCA rules for consumer credit, as codified in the Consumer Credit sourcebook (CONC) for BNPL products. This would involve:

Amending the Regulated Activities Order (RAO) to bring BNPL into the scope of regulation.
Creating a categorisation to draw a distinction between BNPL and other forms of credit.
“Turning off” the CCA for these products, but some elements such as section 75 could be added in.
Applying relevant CONC sections as necessary, with the FCA having scope to develop other provisions.

This approach would not obviate the need for reform of the CCA, but it may provide a solution for the immediate and pressing need to regulate BNPL products.

We would also make some wider points about developing future proof regulation of consumer credit, that will deliver better outcomes and fit with modern, digital customer journeys:

A “box-ticking” approach to consumer protection will not deliver good outcomes for any consumers. It will either curtail services that customers like to use by introducing unnecessary friction into the system for the majority of customers who can afford credit, or it does not actually provide protection for consumers in more vulnerable circumstances, who may not engage fully.
The FCA’s new guidance on the fair treatment of vulnerable consumers (FG21/1) and proposals for a new consumer duty, especially if it is outcome-based, do allow providers to take more innovative approaches to achieving better outcomes. The FCA’s approach enables digital technology to be used to identify consumers in more vulnerable circumstances or with signs of financial vulnerability, and to tailor online action, information and signposting to advice to achieve outcomes that reduce levels of problem debt. This outcomes-based approach should be applied to BNPL requirements.
In addition, BNPL requirements should take account of the FCA’s vulnerable consumer guidance and proposed consumer duty and avoid duplicating these or adding more prescriptive requirements that cut across them.

Development of the consumer credit market and associated regulation

Question 1: Do you agree with our analysis of the business models that underpin the BNPL market?

Innovate Finance generally agrees with the summary of the common model of BNPL agreements as detailed in paragraph 2.9 of the consultation document.

Innovate Finance would add six further details to add some nuance to BNPL business models:

Some features that are listed for the business models of short-term interest-free credit are equally applicable to the BNPL product. Some BNPL providers, especially in some verticals like home improvements, dental or vet services offer the service in-store, not only via online transactions and with much higher average transaction value and for periods longer than three months, i.e., seven to nine months plans.
Many BNPL providers now have their own mobile apps. These operate as a “virtual mall”, where consumers can search for brands and products, then checkout whilst within the app using the BNPL provider’s payment services. This differs from the typical embedded BNPL payment option at the checkout of an e-commerce store.
Some BNPL providers also give customers use of virtual cards (one-time payment cards stored in a digital wallet) as a means of in-store NFC payment with the same offer as a BNPL product presented at an e-commerce store checkout.
Some FinTech banks (sometimes referred to as digital banks or digital challenger banks) are offering, or have announced an intention to offer, “BNPL style” agreements. This model provides bank customers with a virtual card at a checkout which gives the buyer the option of paying in instalments with 0% interest. In some instances, customers can retrospectively change a past purchase from being a debit transaction to a BNPL style payment, by selecting transactions on their bank app and changing the payment setting.
Certain merchants, such as Amazon and Ikea, are offering BNPL agreements for certain purchases using white-labelled technology. FinTech consumer lending technology providers such as Affirm and Jifiti are creating and delivering BNPL-style agreements for these kinds of retailers in such a way that the consumer does not have a relationship with these providers, but solely the merchant, who is also acting as the issuer. In addition, in the UK, Amazon and Barclays have announced a partnership to offer a “pay in instalments” interest-bearing product for certain purchases to Amazon customers.
The assumption in the HM Treasury consultation document is that the BNPL products have an overarching customer relationship and that this governs the instalment loan offered. In practice this is not always the case and some providers are better characterised as having a discrete credit agreement at each transaction.

- A lot of providers do have customers sign up for an account, the terms for that account dictate the BNPL functionality that can be accessed, and the customer then effectively accepts use of that account/functionality at checkout/in an app to make a purchase. For these, each purchase is viewed as a fixed sum credit agreement, but works in an “account” framework with no need for significant additional terms or friction within checkout.
- In other cases there is a discrete agreement for each transaction. These are therefore more like the “short-term interest-free” construct, but based on a small number of payment instalments (e.g. three) and used for lower value transactions.

Finally, Innovate Finance would comment that the BNPL market and innovation is moving at such a pace that any regulatory approach must be able to accommodate further, rapid innovation.

Question 2: Do you have information to provide government with a more granular and up-to-date understanding of the BNPL market?

Innovate Finance would draw HM Treasury’s attention to a recent report by Bain & Company entitled “Buy Now Pay Later in the UK”(“Bain report”), which has a number of detailed and up-to-date statistics on the UK BNPL market.

Innovate Finance has pulled out certain key and interesting statistics from the Bain report, as follows:

Market size

BNPL has evolved into embedded digital payment and lending products used by 25% of e-commerce shoppers and 20,000 merchants.
Transaction value in the UK reached £6.4 billion, or 5% of the e-commerce market, reflecting 60% to 70% annual growth.
Approximately 10.1 million people in the UK have used BNPL in the past 12 months.

Consumer perception

BNPL has quickly become a well-liked product, as evidenced by its Net Promoter Score of 30, compared with 6 for credit cards and –15 for overdrafts.

Consumer use

Bain estimates that over the course of 2020 people using BNPL in the UK saved £103 million in credit card interest costs.
The average BNPL transaction size is between £75 - £100.
On average, BNPL is used by a consumer less than once a month and is seldom used for very large or very small purchases.

Merchants

75% of surveyed merchants said BNPL will be a key part of their growth plan over the next year.
Compared to other forms of payment, 23% of merchants surveyed experienced less fraud with BNPL. As a proportion of sales, they had an average fraud rate of 1.5%, but with BNPL payments this fell to 0.6%. The BNPL provider takes on the full risk of payment and lending.

Question 3: Do you have further analysis or evidence of consumer detriment in the BNPL market?

Innovate Finance agrees with HM Treasury’s assessment that there is relatively limited evidence of widespread consumer detriment materialising at this stage.

Innovate Finance would again draw HM Treasury’s attention to a recent report by Bain & Company entitled “Buy Now Pay Later in the UK”(“Bain report”), which contains analysis of consumer use and risks to consumers associated with BNPL use.

Innovate Finance has pulled out certain statistics from the Bain report, which show that there is relatively little evidence for consumer detriment or risk of consumer detriment from BNPL use, as follows:

The vast majority of consumers make timely repayments; 69% of users Bain surveyed said they had never missed a payment.
63% of BNPL users are in full-time employment, meaning they are nearly 29% more likely to be in full-time employment than all respondents to the survey.
The great majority of users had balances under £100 across all BNPL providers. By comparison, for credit cards and overdrafts, Bain found that 43% of users have balances above £300 (compared with 18% of BNPL users) and 21% have an open balance of more than £1,000 (compared with only 3% of BNPL users).
Bain asked BNPL users how many different BNPL accounts they have an open balance on. 73% indicated they had an open account with either one or no providers at the time of completing the survey.
Only 9% of “average or struggling consumers” say that they cannot easily afford BNPL repayments, and are at risk of falling into problem debt.
BNPL does not carry a ‘poverty premium’ - all users can access the zero-interest rate, even if they are “thin file”. In this way, a regulated BNPL sector can also be part of the solution to financial exclusion, enabling customers to have access to credit at zero interest. This can help spread the cost of an unexpected, necessary purchase in a more affordable way.
Although it is hard to make a precise comparison with traditional forms of credit, such as credit cards, in most similar situations, BNPL is a more cost-effective method of borrowing. In a worked example provided in the Bain report, on a single £75 purchase, if a BNPL user missed the maximum number of four fortnightly instalments, they would be liable to pay £94 (late fees, plus the cost of the purchase). If a credit card user made a single £75 purchase, and missed two monthly payments, they would be liable to pay £101. Most BNPL providers also block a user from making further purchases after missing a number of installments.
Klarna and Clearpay, the two largest BNPL providers in the UK, both have reported a default rate of under 1%.

Question 4: Do you have analysis that would support us in identifying which specific elements of the BNPL business model pose particular risks?

Innovate Finance thinks that there are two areas of the BNPL business model and wider credit market that have the potential to cause risk to consumers in the absence of a consistent, regulated approach.

The first area is the presentation of the BNPL offer and how it is understood and interpreted by consumers. The Bain report highlighted that 58% of BNPL users aged 18–24 and 49% of those aged 25–34 agreed with the statement “BNPL services…do not qualify as debt because they don’t charge interest”.

It would be better for consumers to understand the financial implications of using BNPL products upfront - namely that it is a credit product, there is 0% interest, but if you miss a payment you are liable to pay £x in fees. To reach this understanding, the information needs to be presented in an engaging and impactful way.

The second area is consumers losing track of aggregate borrowing if they used multiple BNPL products. As the Bain report identifies, there is a “long tail of at-risk users”: 6% of BNPL users surveyed by Bain said that they had an open balance across three or more providers. As detailed below, better sharing data between BNPL providers via CRAs and Open Banking, and the provision of aggregate of all types of debt information (not just BNPL) to consumers, would help these at-risk users.

Innovate Finance’s work with the group of BNPL providers and other FinTechs in the consumer credit ecosystem has highlighted that the industry sees the point about visibility of aggregate debt information as an important issue to solve, and notes it is not addressed in the consultation paper. The industry is united in trying to solve this issue.

This links to Innovate Finance’s answer to Question 24, below. In summary, there are key questions to answer relating to credit information:

How can data be shared in such a way to inform BNPL providers’ credit decisions?
How can an approach to affordability checks be made in a way that focuses on good customer outcomes?
How should BNPL providers deliver warnings and signpost to financial advice for those consumers who they identify as being less resilient?
How can consumers have a better picture of their aggregate lending?

Innovate Finance understands that there are consumers in vulnerable circumstances who are likely to get into problem debt. This is equally relevant to other forms of credit such as credit cards and overdrafts. Although the evidence shows that BNPL is not likely to be the cause of unsustainable levels of indebtedness, Innovate Finance accepts that BNPL providers have an important role to play in helping vulnerable customers.

The challenge is how to continue to provide choice and popular services for the overwhelming majority of customers whilst protecting the small percentage of consumers who may be in vulnerable circumstances. A “tick-box” approach is unlikely to achieve good outcomes for the vulnerable or support innovation. The alternative is an outcomes-based regulatory approach, which enables providers to choose how they improve outcomes including for customers in vulnerable circumstances. The FCA’s consumer duty proposals and guidance on vulnerable consumers potentially provide the basis for such a proportionate approach that can achieve better outcomes for all and enable providers to use data to trigger warnings and advice in cases where consumer risk is identified. This is discussed further, below.

Short-term interest-free credit: business model and evidence of consumer detriment

Question 5: Do you agree with our analysis of the business models that underpin the short-term interest-free credit market?

Innovate Finance has noted in answers above that it is difficult to identify the typical model for a BNPL product, particularly given the sector continues to grow and evolve at pace.

Innovate Finance recognises that the perception of BNPL products is that they are used for a high volume of low value items. However, BNPL products are increasingly used to finance higher value goods and services. There are also BNPL providers in the market who are actively targeting this segment, including with longer term instalment plans.

As stated in Innovate Finance’s answer to Question 1 above, we also note that the assumption in the HM Treasury consultation document is that the BNPL products have an overarching customer relationship and that this governs the instalment loan offered. In practice this is not always the case and some providers are better characterised as having a discrete credit agreement at each transaction:

Many providers do have customers sign up for an account, the terms for that account dictate the BNPL functionality that can be accessed, and the customer then effectively accepts use of that account/functionality at checkout/in an app to make a purchase. For these, each purchase is viewed as a fixed sum credit agreement, but works in an “account” framework with no need for significant additional terms or friction within checkout.
In other cases there is a discrete agreement for each transaction. These are therefore more like the “short-term interest-free” construct, but based on a small number of payment instalments (e.g. three) and used for lower value transactions.

Innovate Finance is aware that some of the more traditional, regulated point of sale providers use this model to offer an unregulated product to merchants. This allows them to serve merchants that are reluctant to obtain credit broking permission or who want to test a credit proposition ahead of investment in obtaining this permission. As such, when considering the size and scope of these providers, it is difficult to characterise them as having relationships with relatively few merchants - particularly if considered in the context of both their unregulated and regulated lending.

Question 6: Do you have information to provide government with a more granular and up-to-date understanding of the use of short-term interest-free credit?

Not responding.

Question 7: Do you have further analysis or evidence that supports or undermines our understanding that there is limited consumer detriment in the short-term interest-free credit market?

Innovate Finance would agree that these products appear to have some of the same potential risks for consumer detriment as BNPL. There is also certainly a case for this detriment to be exacerbated by face-to-face sales processes but also by the higher value, longer term nature of this lending, particularly if allowed to persist without appropriate affordability checks and without any visibility to the wider credit sector.

A key issue with these products is whether detriment may increase as a result of proposals impacting the BNPL sector. An example is the impact on consumer understanding and perception. The introduction of a proportionate regime for BNPL products would achieve the aim of providing a baseline level of consumer protection for customers, including the application of section 75 and FOS jurisdiction. Regulated loans – including interest-free lending of more than 12 months – attracts all the protections of CCA 1974. The continued exemption of this form of lending would create a greater comprehension gap where customers are unclear what protections and assurances apply to them.

Another consideration not raised in the consultation is that the extension of the Article 60F(2)(a) exemption from four payments to 12 payments occurred in March 2015. This significantly expanded the exemption, and formed the basis of the 12 months, 12 instalments products described in the consultation. This challenges the notion that these products have existed in the same form for decades and this, as well as the nature of lenders providing them, may explain why they have avoided scrutiny.

These structures remaining wholly exempt may provide some opportunity for new entrants to exploit this position and increase the risk of detriment. Innovate Finance believes it would be sensible to consider applying the same proportionate regime for BNPL products to these structures; such an approach will support appropriate consumer outcomes.

Question 8: Do you have analysis that would support us in identifying which specific elements of the short-term interest-free credit business model serve to protect the consumer from harm?

Not responding.

Differences between BNPL and other short-term interest-free credit

Question 9: Do you agree with the distinction between BNPL and other forms of short-term interest-free credit that has been drawn in this consultation?

Innovate Finance would argue that a clear distinction cannot be made between BNPL and other forms of short-term interest-free credit.

Innovate Finance agrees with HM Treasury’s conclusion that there are many similarities between the products. Although HM Treasury’s points of difference are typical features of BNPL products, they are not universal.

There are examples of providers who do enter into discrete agreements at each transaction and, as has been explained elsewhere, BNPL providers are increasingly servicing higher value transactions at a wider range of merchants. Innovate Finance would add that removing unnecessary friction from checkout experiences should not necessarily be viewed as increasing risks, provided such innovation is balanced with well-designed user experiences and information disclosure (as described above).

Innovate Finance agrees that many of the same sources of potential detriment highlighted in the Woolard Review could apply to short-term interest-free credit. Elements of the short-term, interest-free model suggested, such as face-to-face interaction, the higher level of debt, longer term and lack of visibility to the wider lending sector may also lead to a conclusion that some risks are higher with these products.

In the spirit of “same risk, same regulation”, Innovate Finance does not see a compelling argument why a proportionate approach set out for the BNPL market should not apply equally to products of this nature. The consultation document sets out a clear expectation of minimum standards for consumer protection and responsible behaviour. These standards are welcomed by Innovate Finance and its members, providing a consistent approach to consumer protection, including redress when things go wrong. The benefits of this regulatory approach should be equally applicable and offer the same benefits to both providers and consumers in the short-term, interest-free sector.

Innovate Finance sees a number of clear risks in keeping other forms of short-term interest-free credit outside of the regulatory perimeter.

The first is the creation of an unlevel playing field, whereby certain short-term interest-free credit models (including those that are face-to-face) are at an advantage compared to the digital-only BNPL model. In principle there is no reason why consumer detriment should be any different in terms of interest-free credit and BNPL. The difference is perhaps the size of the market and therefore the number of customers. Furthermore, face-to-face offers of interest-free credit can create their own pressures for consumers.

The second is that it could create the unintended consequence of consumer lenders designing or shifting models to sit outside the regulatory perimeter. This could in effect increase risks to consumers, as irresponsible or unscrupulous lenders could exploit this gap in regulation.

The third is that BNPL providers themselves offer some forms of credit that would be regarded as interest-free short-term credit, and in other cases provide BNPL products in markets that have been identified as ones serviced by short-term interest-free credit - e.g. vet and dentist payment plans.

The fourth is that there is a practical question of how you can clearly create a definition that draws a clear line between BNPL and short-term interest-free credit. Innovate Finance fails to see how this can be done in a way that provides clarity for consumers, retailers and providers. Furthermore, a proportionate regulatory approach should be one that is suited to all providers, including short-term interest-free credit. If there is limited consumer detriment in certain sub markets, then an outcome-based regulatory approach should not create additional burdens.

Finally, there is a need to futureproof regulation, to avoid players making use of a continued exemption. It is not difficult to imagine a situation whereby global retailers who are already offering BNPL products simply create a new short-term interest-free product, market as a credit product akin to BNPL, and operate without the burden of regulation.

Question 10: Do you have any comments on our analysis of the drivers of risk for consumers in the BNPL market?

Innovate Finance is concerned that the main driver of risk described in the consultation is “low friction”. Low friction is not in and of itself as a cause of consumer harm. Targeted friction may be one type of mitigation to specific consumer risks provided it is focused on clear outcomes. Viewing improved customer experience, efficiency and speed in making payments as a problem that needs to be tackled by regulators does not seem to meet the objective of maintaining competition and innovation across the wider consumer credit and payments markets.

As a more general point, treating low friction as a principle driver of risk is an approach that would block many previous and future innovations and improvements in customer service. The financial services sector is heading towards lower friction transactions across the board, including via embedded payments models. For the majority of consumers this is not a risk. As the Bain analysis showed, the majority of users find BNPL affordable; the 9% who don’t find it affordable do merit the focus of providers and regulators to reduce that level over time. Innovate Finance sees the need for outcome-based solutions that can support the 9% without hindering the 91%.

Innovate Finance would agree with the assessment that it may prove challenging for consumers to keep track of their borrowing in aggregate (across all forms of credit, not just BNPL), especially for the “long tail” of at-risk consumers.

Innovate Finance would argue that the best route to reducing risks to BNPL is through improving consumer education of BNPL products (including how offers are presented) and delivering accurate, up-to-date and easy to understand information to consumers on their debt positions.

Drawing distinction between BNPL and other short-term interest-free credit in regulation

Question 11: Do you have any suggestions on how a clear distinction could be drawn between BNPL and short-term interest-free credit?

As covered in Innovate Finance’s answer to question 9, Innovate Finance does not think a distinction can be drawn between BNPL and other forms of short-term interest-free credit.

Question 12: Do you have any comments on the option to draw that distinction by restricting the extension of regulation to interest-free credit agreements where there is a third-party lender involved in the transaction? What impact do you think this would have on short-term interest-free credit providers that would be drawn into regulation?

Innovate Finance would highlight the potential for unintended consequences by regulating agreements where a third-party lender is involved in the transaction.

With reference to points 2) and 3) in Innovate Finance’s answer to question 1, there are now BNPL products on offer to consumers that do not involve a third party lender.

In this case of large, global merchants such as Amazon and Ikea, BNPL products are delivered “as a service”, meaning the back-end platform is provided and no third party lender is involved as the merchant is the issuer of credit. This is different to the model discussed within the consultation. It is not clear from the consultation document whether these white-labelled models would count as a third-party lender.

Innovation in BNPL or “BNPL style” products is moving at a rapid pace, with many new providers coming to market. Innovate Finance would question whether drawing the regulatory boundary based on the existence of a third-party lender involvement would prove effective as the short-term interest-free credit market could shift quickly to operate outside of regulation.

There is also a question as to whether this approach would adequately protect the credit providers highlighted in the consultation or rather whether it would favour large, dominant merchants with the capability of funding and developing their own exempt credit platforms, which could inadvertently exacerbate competition with smaller merchants.

Therefore, it is not clear whether taking this option would help achieve the overarching objectives of maintaining healthy competition in the consumer credit market and reducing consumer detriment.

Question 13: Do you have any comments on the option to draw that distinction by defining a BNPL agreement as one where there is a pre-existing, overarching relationship between the lender and consumer, under which the lender agrees to finance one or more transactions but where any repayments made are toward specific agreements made as part of that relationship?

Innovate Finance would point out that there are already BNPL products which do not necessarily have the “overarching relationship” characteristic. As a result, this definition would be too narrow. As such, Innovate Finance shares HM Treasury's concerns that it would encourage avoidance

Question 14: Do you have any views on the need to amend the current exemption for running-account credit, so that it does not allow the unregulated BNPL model to re-emerge?

Innovate Finance agrees that there is a need to amend the current exemption for running-account credit. Some BNPL providers are currently structuring products as running account credit (including 'virtual cards’4). Nonetheless, BNPL providers amongst Innovate Finance members want to see any potential loopholes closed to shore up regulation and maintain consumer protection across the board.

Amending the current exemption should close a potential loophole that could be exploited by new entrants and / or less scrupulous firms. It is not difficult to imagine products being offered under this exemption branded as “Buy Now, Pay Later”, even though the offer would be different to that of mainstream BNPL players.

As a more general point, Innovate Finance would suggest that the number of exemptions within the CCA that are being discussed in this section of the consultation highlights the difficulty of adapting the Act to regulate BNPL. A better approach may be found by adapting FCA rules for credit, which would involve:

Amending the RAO to bring BNPL into the scope of regulation.
Creating a categorisation to draw a distinction between BNPL and other forms of credit
“Turning off” the CCA for these products, but some elements such as section 75 could be added in.
Applying relevant CONC sections as necessary, with the FCA having scope to develop other provisions.

⁴ Virtual credit cards, which are regulated under running account credit, as distinct from a ‘virtual one-time card stored in the digital wallet that can facilitate in-store NFC payments’.

The application of credit broking regulation

Question 15: Do you agree that in any regulatory intervention merchants that offer BNPL as a payment option should not be subject to FCA regulation as credit brokers?

Innovate Finance strongly agrees that merchants that offer BNPL as a payment option should not be subject to FCA regulation as credit brokers in any regulatory intervention.

If regulatory intervention were to make merchants subject to FCA regulation as credit brokers, it would dramatically increase burdens on small businesses and set a dangerous precedent for future regulation. This would run counter to HM Treasury’s aim to ensure that “any burden on merchants offering BNPL as a payment option would be proportionate and manageable and should not disadvantage small and medium sized enterprises (SMEs) over larger merchants.”

Statistics from the Bain report highlight the value of BNPL partnerships for merchants, particularly smaller ones:

54% of merchants have their brand exposed to new customers through co-marketing activities, and 23% could track the direct referral of customers from their BNPL providers.
When customers visited a store, 57% of merchants using BNPL reported an increase in basket conversion, and 46% experienced an increase in average order value.
BNPL is supporting greater democratisation in online retail. As an example, more than 90% of Klarna’s merchant partners in the UK are small and medium sized enterprises (SMEs) with under £2 million in annual turnover.

Data provided separately by Clearpay indicates that 98% of its merchant partners are SMEs.

Question 16: If merchants offering BNPL are exempted from credit broking regulation, do you have any views on other ways to mitigate any potential risks to consumer detriment arising from merchants?

Innovate Finance would suggest that the other steps to regulate BNPL discussed in this consultation will be sufficient to reduce risks to consumers, and therefore will not require further action on the part of merchants.

Innovate Finance would add that BNPL providers are already subject to Advertising Standards Authority rules. Furthermore, recently released ASA guidelines on BNPL providers require any advertising of their products to clearly state that their services are a form of credit that might not be suitable for all and can affect credit scores. This intervention has proved sufficient in ensuring BNPL is marketed appropriately at checkouts.

Question 17: Do you have any views on whether such an exemption from credit broking should extend to all merchants, or whether there should be limited exceptions (such as for domestic premises suppliers)?

Not answering.

Advertising and promotions

Question 18: Do you think that the current requirements on BNPL merchants and lenders around advertising and promotion are sufficient?

Innovate Finance would like to flag three points in relation to advertising and promotions for BNPL merchants and lenders:

Level playing field: Innovate Finance thinks that the main objective of regulators should be to ensure that BNPL promotions and adverts are treated in the same manner as those for other forms of credit, especially credit cards. A consistent regulatory approach should be taken to advertising across all types of credit products, including those which are considered “aspirational”.
BNPL providers are subject to Advertising Standards Authority rules. Furthermore, recently released ASA guidelines on BNPL providers require any advertising of their products to provide a balanced view of the risks and benefits of products, including clearly stating that their services are a form of credit that might not be suitable for all and can affect credit scores. In some cases, disclosures about late fees may be required. Arguably this goes further than the requirements applied to regulated lenders, which would allow advertising of an “interest-free” product as 0% APR, without mentioning late fees.
Proportionality: Innovate Finance recognises that HM Treasury has considered the means to make operating under the financial promotions regime proportionate for SMEs. Innovate Finance would like to understand the practical detail of how it would apply to small businesses to be sure it would be a proportionate move.

Question 19: If you think that the requirements need strengthening, would the application of the financial promotions regime be appropriate, or are there any features specific to BNPL products that warrant different requirements?

Innovate Finance’s answer to this question is covered in its answer to question 18, above.

Pre-contractual information

Question 20: Do you agree that the approach to pre-contractual information outlined is consistent with a proportionate approach and the government’s objectives for BNPL regulation?

Innovate Finance agrees with the Government's view that “the detailed and inflexible requirements for information disclosure in section 55 of the CCA” should not be applied. This is a clear example where applying the CCA approach would not be appropriate. Innovate Finance thinks that regulation should ask for a very simple and standard form of pre-contractual information. BNPL agreements are by their nature simple and straightforward; long and complicated pre-contractual information should not be necessary.

An appropriate form of pre-contractual information for BNPL could cover:

That it is a credit agreement
That there is no interest on the purchase
The repayment will be £x
Fees the user will be liable to pay if they are late on instalments
User has access to the FOS

Not all the FCA CONC requirements on information disclosure will be relevant or proportionate to BNPL agreements.

A proportionate approach also needs to make a distinction between an initial account agreement with a BNPL provider and individual purchases.

The FCA should be asked to consult on a simple, proportionate set of disclosure requirements.

Innovate Finance would also encourage the government and FCA to consider an approach based on setting expected consumer outcomes in this case, as opposed to being prescriptive about what exact wording must be in pre-contractual information.

As Innovate Finance stated in its submission to the FCA’s consultation on the new consumer duty (DP 21/13), FinTech companies are well-placed to test, measure and iterate their consumer communications. The simplicity and transparency of how FinTech companies present information to their customers is one of their great strengths. FinTech companies have the data-driven insights to identify how best to drive better consumer engagement with pre-contractual information and ensure such information is digested and understood.

Innovate Finance thinks this kind of outcomes-approach should be explored further. Any BNPL CONC requirements should take account of FCA consumer duty proposals on consumer understanding.

Form and content of the credit agreement

Question 21: Do you agree with the government’s assessment that BNPL agreements are likely to need bespoke form and content requirements?

Innovate Finance agrees with the government’s assessment that the CCA provisions on form and content of credit agreements are inappropriate. BNPL agreements are likely to need bespoke form and content requirements.

As mentioned above, BNPL products are simple and straightforward, which is part of the reason they appeal to consumers. As such, Innovate Finance thinks that form and content requirements need to reflect the simple nature of the products in order to be proportionate.

Innovate Finance would reiterate that an outcomes-based regulatory approach, which enables providers to choose how they improve outcomes, including for customers in vulnerable circumstances, would be more suitable. Bespoke proposals should be considered alongside current proposals for a Consumer Duty, to ensure that they are complementary and do not create additional or overly prescriptive requirements on form and content.

Question 22: Do you have any views on what form agreements for BNPL should be required to take, and what content they should contain?

Innovate Finance’s answer to this question is covered above in its answer to question 21. As noted above, requirements should be outcome-based.

The FCA could provide broad rules around contract content, setting minimum standards but allowing providers the ability to innovate and ensure customers understand and engage with content. The approach taken in CONC 4.2 in respect of pre-contractual information could be a good example of how the content requirements for BNPL agreements might be structured.

Improper execution

Question 23: What are your views on applying CCA provisions on improper execution to BNPL agreements? Do you think the consequential sanctions for improper execution should apply to BNPL agreements under any regulatory intervention?

Innovate Finance’s view is that CCA provisions on improper execution should not be applied to BNPL agreements.

Innovate Finance would suggest that BNPL products are simple and relatively low risk compared to longer-term, interest-bearing credit products. As a result, applying CCA provisions on improper execution to BNPL agreements would be disproportionate, would harm lenders and merchants, and would not serve to reduce consumer risk in any meaningful way.

Innovate Finance would add that provided that consumers understand the products and the risks associated from the pre-contractual agreement and form and content of the agreement (discussed above) there would be no need to apply improper execution provisions.

Furthermore, the consequence of improper execution is unenforceability without a court order. Innovate Finance believes that the relatively low values of BNPL agreements create a context where enforcement action is generally unlikely. As such, this does not provide practical protection to consumers but simply adds complexity to user experiences, which undermines innovation, and a need to manage risk of challenge from case management companies, who may not be acting in the interests of customers.

Creditworthiness assessments

Question 24: What are your views on the role of creditworthiness assessments as part of a proportionate approach to BNPL regulation?

Innovate Finance regards creditworthiness assessments as a crucial part of regulation of BNPL. An innovative approach to assessing creditworthiness is needed.

This is perhaps the most important part of any regulatory regime for BNPL: addressing the risk that consumers take out credit from multiple providers that they are unable to afford. We have to get this right in order to help consumers in vulnerable circumstances. The Government proposals are surprisingly short on proposals to mitigate this and improve the availability and quality of information that solutions may require.

The Bain report says that 9% of “average or struggling consumers” say that they cannot easily afford BNPL repayments, and are at risk of falling into problem debt.

Before looking specifically at credit worthiness assessments, we need to start with the desired outcome: ensuring people do not take credit which they can not afford without adversely affecting their financial situation and in particular those in vulnerable or less resilient financial circumstances.

The first step is to identify affordability and financial vulnerability. Credit worthiness assessments are important for all customers and are the gateway to assessing vulnerability.

Regulation should also require that action is taken to achieve good outcomes for those who are identified as vulnerable or less resilient. This may include adjusting credit limits, declining credit, providing warnings, providing information and advice or signposting to sources of financial advice. The new FCA guidance on vulnerable consumers should provide the basis for this.

Regulation should set out outcomes both at a high level - ensuring affordability of credit - and in terms of assessing affordability, taking appropriate actions and providing information that enables positive outcomes for the consumer, and providing information that can better enable the consumer to manage their finances and keep track of credit.

In terms of creditworthiness assessments, the following principles should be applied:

Providers take different approaches to creditworthiness, and within that affordability, assessments, because no one route provides the silver bullet. It is important providers are given latitude to approach assessments in a way that they deem can most effectively help them to meet the intended outcome.
It would be worth exploring innovative approaches to creditworthiness assessments in a sandbox environment. The FCA could help facilitate this.
Any approach should avoid exclusive reliance on Credit Ratings Agencies (CRAs) for creditworthiness assessments. As described in the Bain report, CRAs were designed for credit products where larger sums are borrowed for a longer term than typical BNPL products. They can be particularly useful for assessing credit risk as part of an initial account agreement to establish a ‘credit line’, but they tend to be expensive and inappropriate for assessments of individual (and smaller) purchases. There is work underway by CRAs to develop BNPL categories which may provide better solutions in due course (see below).
Open Banking technology has shown promising signs of providing financial data to assess creditworthiness. However, Open Banking is not universally used by consumers, and does not provide a complete and comprehensive picture of an individual’s financial life. The next iteration of Open Banking, “Open Finance”, is being built by the FCA, but is unlikely to be operationalised for a few years. Nonetheless, if rolled out effectively, Open Finance would be an excellent solution to creditworthiness assessment.
BNPL providers have used their own data and algorithms to minimise lender risk, with larger players reporting default rates of less than 1%. Innovate Finance would comment that crowding out novel and effective ways of assessing credit risk might stymie further innovation in this area.
The latest Credit Information Market Study, which is due to be published in 2022, will likely provide valuable insights to inform the role of creditworthiness assessments as part of a proportionate approach to BNPL regulation.

Question 25: Do you have any views on whether there should be specific requirements for creditworthiness assessments for BNPL agreements?

Turning to specific regulatory requirements:

An outcomes-based approach will be best, drawing on the FCA’s consumer duty and guidance on vulnerable customers and ensuring that any CONC rules for BNPL complement these outcomes-based approaches and are not overly prescriptive in terms of how good outcomes are achieved.
It is important that a distinction is made between an affordability assessment when a consumer first uses a BNPL product, and an assessment for each and every purchase.
Any regulatory requirements should avoid specifying the method of making affordability assessments and should encourage more innovative solutions by a more diverse and competitive credit information market to achieve better outcomes.
One additional element, which is noted in section 2.23 of the Government consultation,is how consumers can be helped to keep track of their credit in aggregate. This is an issue that is applicable to other forms of credit as well as BNPL. A solution could be developed in the longer term with the use of Open Finance technology and as part of the extension and evolution of Open Banking rules to help customers track all credit (not just BNPL) in aggregate. Mandating sharing of data of credit agreements like BNPL should be carried out as a wider exercise across all credit and as part of Open Finance (not as a separate workstream).

Question 26: Do you have any views on how BNPL agreements should be reported to consumers’ credit files?

In looking at credit reporting, we need to start by identifying the desired outcomes for consumers, BNPL providers and other credit providers, and the credit information market as a whole:

Desired outcome for consumers:

People can choose to use BNPL to help build up their credit score. This would be a valuable tool in reading financial exclusion for those with ‘thin credit files’.
Use of BNPL should not penalise people’s credit files - frequent, small credit transactions (and associated credit checks) should be treated proportionately by CRAs. In other words, a BNPL purchase of a pair of shoes should not be counted the same as buying a car; and more frequent checks for small BNPL purchases should not count as hard credit checks that affect overall credit score.

Desired outcome for BNPL and other credit providers:

BNPL credit should feed into an aggregate picture of credit risk. Credit assessments for other providers are incomplete if they exclude BNPL data.
BNPL providers should share information with each other to ensure that they have an affordability assessment for each consumer based upon aggregate BNPL credit across all providers.

Desired outcome for credit information market:

A diverse, competitive and innovative credit information market, providing better quality and timely information and proportionate products for different requirements.

A number of actions are needed to achieve these outcomes:

A new CRA category, developed by an inclusive, transparent process. There is a clear need to advance work with CRAs to develop a new category for BNPL (as well as other short-term interest-free credit) which does not unduly penalise customer's credit scores when they take out frequent credit for small purchases.

We note that HMT and the FCA are both speaking to SCOR and CRAs regularly on a number of initiatives and that elements of these discussions may cross over into developing requirements for BNPL products. Given the expectation that BNPL products should integrate into the wider CRA framework, it would be welcomed if BNPL providers were represented in these discussions.

We would strongly recommend that Treasury and the FCA facilitate a more independent, transparent and inclusive forum for agreeing a new CRA BNPL category which includes the BNPL providers themselves.
A level playing field in access to affordability data. The FCA credit information market study should consider how to ensure that BNPL providers (and others) can be relied upon to provide credit information to providers including CRAs and how in turn there is a level playing field in access to credit rating information. The role of CRAs is key to a healthy, efficient credit market but these remain private corporations who operate based on a principle of reciprocity. This already places non-bank lenders at a competitive disadvantage and smaller FinTech lenders are typically also at a commercial disadvantage. If there is to be an expectation that BNPL data is reported, there should also be recognition that this has some commercial value to the CRAs and their other clients. We would therefore welcome consideration of whether a minimum level of affordability data should be provided to all lenders, irrespective of status, to support better policy outcomes.
Industry cooperation. BNPL providers should collaborate to agree how they will share information with each other and develop solutions to enable their customers to keep track of aggregate BNPL credit across multiple providers.
Developing alternative credit decisioning. As part of the FCA’s current study of the credit information market Innovate Finance would encourage developing alternative credit decisioning using Open Banking and identify where open banking may need to be extended further to enable accurate credit decisioning.

In relation to the points above:

There are a number of FinTech companies developing credit scoring products based on novel uses of data (including Open Banking data) that must be involved in this work.
All of these actions should also be applicable to the wider short-term interest-free market, with any requirements applicable to short-term interest-free providers as well.

Arrears, default and forbearance

Question 27: Do you have any views about how customers in financial difficulty should be treated under BNPL agreements?

Innovate Finance would support the application to BNPL of existing FCA rules requiring regulated firms to treat customers in default or in financial difficulties fairly and with forbearance and due consideration.

There may be scope to codify (perhaps on a voluntary basis) best practice in the industry such as capping late fees and pausing accounts after the first missed payment. The Australian Finance Industry Association (AFIA)’s BNPL Code of Practice provides a good example of this exercise that UK regulators could consider.

CCA requirement on firms for consumers in financial difficulty

Question 28: What are your views on the proportionality of applying CCA provisions on arrears and defaults to BNPL agreements?

Innovate Finance strongly agrees with the principle that there needs to be rules in place regarding arrears and defaults to BNPL agreements. However the CCA provisions are wholly inappropriate both in terms of timely and effective communication with consumers and in terms of proportionality. The 1974 CCA provisions on arrears and defaults are outdated and overly prescriptive and do not provide the basis for desired outcomes for consumers. Better outcomes can be achieved using more timely and easily understandable forms of communication.

Applying the CCA provisions on arrears and defaults, as detailed in paragraph 3.41 of the consultation document, would not be proportionate to the level of risk presented to consumers by use of BNPL products.

Innovate Finance does not dispute the value of ensuring customers receive clear communications regarding arrears, including signposting to appropriate sources of support. However, adopting the statutory arrears notices for BNPL providers is not likely to drive the right outcomes for BNPL consumers for a number of reasons:

The tone and content of the communications requires adjustment more broadly, and feels inappropriate for a product with the risk profile of a BNPL product.
The notices are difficult for customers to understand.
There are complexities or barriers to providing them electronically, which is the primary way customers expect to interact with BNPL providers.
The timescales associated with provision of these notices may also not drive the right outcomes. BNPL products tend to be short term. Fees, charges and arrears positions may have cleared by the time notices are required to be provided, which adds to confusion and adds complexity for no benefit.
Many regulated credit providers rely on large systems of record who are able to populate and send these notices as required. BNPL providers may not universally have such capabilities and may require investment in systems and processes to support them. This places additional compliance costs onto firms operating in a relatively low margin environment, without clear justification for why the same outcome could not be achieved more simply through more flexible, appropriate notification requirements.

A more flexible, outcomes-based approach to notifying customers is likely to drive lower costs and complexity for the industry while providing better outcomes for customers. If electronic methods of communication are supported, it is likely customers will get the relevant information in a more timely and consumable way, which may help address potential detriment and encourage early intervention.

Innovate Finance would further suggest that it may be better to adapt the regulations set out in FCA CONC 7.3 “Treatment of customers in default or arrears (including repossessions): lenders, owners and debt collectors” in such a way that they are appropriate and proportionate for BNPL agreements specifically. This would provide a set of rules for all BNPL providers to follow to give consumers greater protection from detriment, and would be proportionate to the level of risk and not be overly burdensome to BNPL providers.

Innovate Finance would add that in 2022, the FCA will be consulting on how firms should handle and support borrowers in financial difficulty. The FCA is currently consulting on a new 'Consumer Duty', which is on top of existing Principle 6 (treating customers fairly). Taken together, there will be adequate FCA protection without the need for CCA application

Section 75

Question 29: Do you agree that under any regulatory intervention for BNPL, section 75 of the CCA should apply to agreements?

Innovate Finance agrees that under any regulatory intervention for BNPL, section 75 of the CCA should apply to agreements. This would bring BNPL users an additional and welcome level of comfort when using BNPL products. In this way, it would bring consumers another layer of protection from detriment without overburdening BNPL providers in a disproportionate manner.

Innovate Finance also notes and supports the FCA’s comments on section 75 in its review of the retained provisions of the Consumer Credit Act, and would welcome wider reform.

Small agreements

Question 30: What are your views on amending the scope of the exemptions from elements of the CCA for small agreements to include BNPL agreements under £50.

Innovate Finance’s view is that if the regulatory regime for BNPL is designed in a proportionate way, it may make sense for all BNPL agreements, regardless of their size, to be subject to the same rules and regulations. In this case, it would mean including BNPL agreements under £50.

Innovate Finance would add that this is another section of the consultation that highlights the difficulty of adapting CCA rules to regulate BNPL. As discussed in the introduction to this consultation response, Innovate Finance would question whether a better route may be to apply FCA rules in CONC to BNPL.

Question 31: Are you aware of any currently-regulated consumer credit products, in particular those which are debtor-creditor-supplier agreements, that are routinely offered with values less than £50?

Innovate Finance is not aware of any products of this kind.

Financial Ombudsman Service and redress

Question 32: Do you agree that under a regulatory intervention for BNPL, consumers should be able to bring a complaint to the FOS?

Innovate Finance agrees that consumers should be able to bring a complaint to the FOS relating to BNPL companies. Innovate Finance thinks such a move would help ensure consumers can access dispute resolution if BNPL companies are acting poorly.

A number of reforms are needed to ensure a proportionate approach and effective outcomes:

First, we need to ensure that FCA and FOS take a consistent approach to BNPL. Agreeing a common interpretation of the rules and, where outcome-based approaches are applied, common expectations for outcomes, will be critical to provide a clear, consistent approach. A clear process is needed to ensure consistency between FOS and FCA. This is an issue in existing regulated areas and wider reform is needed to ensure that FOS judgements are consistent with FCA interpretation and with UK regulation.

Second, Innovate Finance thinks a much reduced FOS case fee would strike the appropriate balance between offering an effective mechanism for consumer redress without overburdening BNPL companies with new and disproportionate costs.

At present the FOS case fee is £750 per case, regardless of the outcome of the case. This level of fee is disproportionate relative to the typical size and scale of BNPL companies, and relative to the detriment consumers are likely to face from using BNPL products. (Innovate Finance’s understanding is that the £750 figure was set by the FOS with complicated and high-value cases in mind).

A £750 case fee would drive unintended consequences and behaviours: it would incentivise firms to settle complaints as a cheaper alternative to FOS - but this would mean that the root cause of complaints may go under the radar and opportunities to raise standards are missed.

This can also be weaponized by claims management companies. The FCA and FOS need to identify how they will prevent irresponsible and speculative campaigns by claims management companies which can quickly generate massive costs for a credit provider even if the claims are not upheld.

Equality impact assessment

Question 33: What impacts do you expect the regulation of BNPL would have on BNPL providers, consumers that use the product, and merchants that offer it as a payment option?

Not responding.

Question 34: What impacts would you expect to see on persons with the protected characteristics mentioned above as a result of regulation of BNPL?

Innovate Finance would suggest that the only relevant protected characteristic is age. There could be potential concern about the exclusion of older age brackets who do not use BNPL products, but this only would really be an issue if BNPL is used without other payment options.

For younger users, there is the issue highlighted above that younger age brackets do not tend to see BNPL services as debt, and the likelihood that BNPL is their first experience with credit payments might increase this risk.

Question 35: Do you have any views on how the government can mitigate any disproportionate impacts on protected characteristics?

Not responding.