BNPL – how are governments in the UK, US and Australia responding?

Introduction

Buy now, pay later (BNPL) schemes have surged in popularity, providing for short-term financing that allows consumers to make purchases and pay for them at a later date. Generally, the majority of BNPL users are younger consumers under the age of 35 who are sometimes less financially literate than older generations. Most common BNPL credit agreements have fallen largely outside the scope of existing regulatory regimes. Recently, governments have sought to amend their regulatory frameworks in a way that would bring BNPL into scope. Such amendments seek to ensure that consumers are protected from irresponsible lending practices that could lead to over indebtedness. Following on from our previous Regulation Around the World issue on BNPL, this short briefing note provides a high-level snapshot of the state of play for BNPL legislation in three key markets – UK, US and Australia.

UK

Introduction

Some two years ago, in June 2022, HM Treasury published the UK Government’s response to its October 2021 consultation on the regulation of BNPL products. The consultation was preceded by an announcement from the UK Government, indicating that it wanted to bring unregulated interest-free BNPL products within the scope of regulation in a proportionate way, given the potential risk of consumer detriment.

Among the key messages from the UK Government was that the distinction between BNPL and short-term interest free credit (STIFC) made in the first consultation had been re-evaluated, so that third party providers of both BNPL and STIFC would be brought into the scope of regulation. Merchants providing STIFC themselves could remain outside scope unless the product was provided online or at a distance. Merchants would also remain outside the scope of regulation as credit brokers.

In February 2023, HM Treasury issued its second consultation paper on BNPL together with draft legislation. The headline from the consultation was that the UK Government provided its view that the scope of regulation should be limited to agreements that are offered by third-party lenders. The UK Government also proposed a temporary permissions regime which would allow firms to transfer into the new regulatory regime before seeking full FCA authorisation at a future date. 

The HM Treasury consultation closed in April 2023 and a consultation response was expected which would set out the next steps. Secondary legislation to bring BNPL into the UK regulatory perimeter was also expected.

Pause button

Since the closure of the second HM Treasury consultation the UK Government appeared to have pressed the pause button on its plans for BNPL reform. In the media it was reported that the pause was partly triggered by firms threatening to withdraw from the UK in favour of more light-touch jurisdictions. This was disputed by some who argued that the reason for the delay arose out of concerns regarding partly regulating a tech heavy industry with a piece of legislation that was drawn up 50 years ago (Consumer Credit Act 1974 (CCA)) and which is, itself, a target for reform. Whatever the reasons for the delay, the BNPL industry has been left facing uncertainty as to the timing, and detail, of future reform.

UK General Election

But change may be on its way.

The Labour Party is widely expected to win the 2024 General Election. Labour has already made a pledge on BNPL regulation saying it would “bring forward long overdue consumer protection regulation in areas like buy now pay later.”

But what will BNPL reform look like under a Labour Government?

In its manifesto for the 2024 General Election Labour makes no comment on BNPL but in its January 2024 ‘Financing Growth’ paper it stated that building on conversations with the sector it had laid out a plan for regulation which had received broad support from the sector.

As regards Labour’s plan, we have so far seen little detail. For instance, Labour has not provided further clarity to date on whether it will resurrect the legislative proposals previously advanced by HM Treasury for regulating BNPL providers, or whether it will take an alternative approach. The nearest we have seen in terms of detail is a letter dated 5 November 2023 from the Shadow City Minister, Tulip Siddiq MP, to the Economic Secretary to the Treasury, Andrew Griffith MP. In this letter Siddiq set out five high level principles for regulating BNPL:

• BNPL products must deliver good outcomes for consumers, by ensuring customers have access to clear information.
• Consumers must have protection if something goes wrong.
• Bad actors must raise their standards or be denied access to the market, to ensure vulnerable consumers are protected.
• Regulation must be proportionate to support innovation in the sector, in order to ensure that consumers’ are able to access BNPL products.
• Regulation must be introduced urgently, in a way that works both for the sector and consumers.

When describing the above principles Siddiq references in a couple of places the Financial Conduct Authority’s Consumer Duty and in particular that BNPL products “must deliver good outcomes for consumers, by ensuring customers have access to clear information”. She also criticises the CCA, stating that the Act with its complicated and prescriptive disclosure requirement is not working and instead there is a need for guidance that is simple, clear and understandable.

How these principles will translate into legislative and regulatory reform remains to be seen. However, given Labour’s view that its plan can be ‘implemented quickly’, it may reasonably be expected that specific details for their proposed approach may follow not long after the election.

United States

State level

In early January 2024, New York Governor Kathy Hochul unveiled a sweeping consumer protection agenda, one of the first planks of her 2024 State of the State. Governor Hochul announced her plans to propose legislation to require BNPL providers to obtain a license to operate in the state, and to authorize the New York State Department of Financial Services to propose and issue regulations for this rapidly growing industry.  Separate and competing bills related to BNPL were introduced by a member of the New York State Assembly in March 2024 and a member of the New York State Senate in May 2024, and may serve as alternatives or counters to Governor Hochul’s proposal, which raised a number of concerns from stakeholders and members of the legislature.  While New York State lawmakers have been negotiating three different BNPL proposals, their attempt to pass legislation before the end of the legislative session in June 2024 was not successful.

New York’s efforts are aligned with other government actions taken at the end of 2023 related to BNPL, including the Office of the Comptroller of the Currency’s guidance for banks related to BNPL lending. The same is true of a letter from a group of Democratic senators to Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra, urging BNPL oversight. It appears from the press releases that New York is also building on efforts that several other states have started.

Prior to New York’s announcement, California was leading the way in the BNPL space, having already incorporated BNPL products under its California Financing Law.

Other states have also taken a cue from California and started to examine their own regulations (or lack thereof) in the BNPL sector. For instance, in Massachusetts, small loan companies and retail instalment finance companies must have a state license to operate, and regulators have yet to say whether all BNPL providers – big or small – will likewise be required to obtain a license. In Oregon, regulators have said that they are working with several other states to monitor the BNPL industry and consider action, including the potential creation of BNPL-specific state statutes, which would provide regulatory oversight of BNPL products.  

We would not be surprised to see other states – especially those that routinely take the most progressive stance on consumer protection – follow New York’s lead here, especially as this sector continues to rapidly grow and consumers are increasingly turning to BNPL as a low-cost alternative to traditional credit products to pay for everyday and big-ticket purchases.

National level

The CFPB on May 22, 2024 issued an interpretive rule that imposes some of the same rules on BNPL providers that apply to conventional credit card providers. Specifically, the rule applies to digital user accounts used to access credit, including to those providers that market loans as BNPL. The interpretive rule clarifies that the business practices of providers marketing their loans as BNPL will typically trigger the consumer protections in existing federal law and regulation that apply to traditional credit cards, including those related to billing disputes, refunds for returned products or cancelled services and disclosures such as periodic billing statements. Although market participants’ loan offerings vary in the BNPL sector, the CFPB issued this interpretive rule “to clarify existing obligations for market participants with specific business practices.”

The issuance of this interpretive rule was long expected, as Director Chopra stated almost two years ago that he had asked CFPB staff to identify potential interpretive guidance or rules to issue with respect to BNPL, with the key objective being to extend “many of the baseline protections that Congress has already established for credit cards” to the BNPL sector. That said, the rule marks a significant step forward in getting BNPL regulation in place in the United States. This additional regulatory backstop could actually help to drive more confidence in these products, and so far industry seems to be generally supportive of the interpretive rule.

Going forward, we expect to see the CFPB use a number of tools to oversee the BNPL sector, including the authority to bring claims of unfair, deceptive or abusive practices, supervisory examinations, and other market monitoring and investigation.

For further information please see our client alert CFPB takes steps to regulate “Buy Now, Pay Later” providers.

Australia

Current regulatory position

Historically, BNPL products have not been regulated under Australia’s consumer credit laws (principally, the National Consumer Credit Protection Act 2009 (Cth) (Credit Act)).  This is because credit regulation in Australia has typically focussed on protecting consumers from deceptive or predatory lending practices, and from being charged excessive fees.  Accordingly, credit laws have not applied to low cost continuing credit and low cost, short term credit products (such as BNPL).  

Like many developments in the payments system space, it is clear that regulators, and the law, have struggled to keep up.  This is definitely the case in the context of BNPL products, where many markets (including Australia) have seen a grown in BNPL products driven by the COVID-19 pandemic, and consumers seeking higher purchasing power and the ability to split their purchases into interest free instalments.  On 12 March 2024, the Honourable Stephen Jones MP, Assistant Treasurer and Minister for Financial Services, recognised how the emergence of BNPL products has created new opportunities in the Australian economy, noting estimates that BNPL adds as much as $18.4 billion to GDP and supports more than 120,000 jobs.

This is not to say there are no current obligations imposed on BNPL providers in Australia.  There is an industry code of conduct, to which most of the major BNPL providers are subscribers, aimed at providing good consumer outcomes across the diverse range of business models operating in the BNPL industry.  BNPL products fall within the scope of the Australian Securities and Investments Commission’s (ASIC) relatively recent design and distribution obligations (Part 7.8A of the Corporations Act 2001 (Cth)).  These obligations require the industry to design fit-for-purpose products that meet consumer needs, and ensure that their products are reaching the right consumers.

Pipelined changes are coming

This above position will soon change in Australia. 

On 12 March 2023, the Australian Government released an exposure draft legislative package on BNPL regulatory reforms (Draft Package). The Draft Package is open for public comment until 9 April 2024.

The Draft Package includes an exposure draft bill, explanatory memorandum, exposure draft regulations and explanatory statement. The draft bill sets out the new regulatory framework for low cost credit contracts (LCCCs) that will apply to BNPL contracts and arrangements. 

The explanatory memorandum establishes clear legislative intent to extend consumer protections to LCCCs and sanction LCCC providers who structure their businesses to avoid regulation. The draft regulations prescribe the maximum fees and charges, and enquiries and assessments, applicable to LCCCs, while the explanatory statement includes practical examples of how the proposed laws are intended to apply.

Business practices and interactions with Australian consumers who purchase goods and services using BNPL products will soon dramatically shift in the following ways:

• BNPL providers will be expected to obtain an Australian credit licence, or modify their existing licence to include an authorisation to provide LCCCs. 
• Operating under a credit licence will require BNPL providers to comply with enhanced consumer protection measures, such as increased disclosures and terms. 
• BNPL providers will have the choice as to whether they comply with the existing responsible lending obligations (RLOs), or whether they choose to implement a modified RLO framework that scales closer to the risks posed to consumers. 

The reforms will extend regulation of BNPL products as a form of credit under the Credit Act, the National Credit Code and the National Consumer Credit Protection Regulations 2010 (Cth) (together, the Credit Law). The biggest impact will be felt by BNPL providers, though credit representatives and merchants (i.e. retailers of goods and services) may also be affected.