Credit Management September 2023

CONSUMER CREDIT
In difficult financial times, many individuals resort to
short-term credit. However, BNPL firms must ensure
that they aren’t contributing to funding non-essential
day-to-day expenses for the young and vulnerable.
– Eddie Flanagan
The Government has previously emphasised
the need to protect UK consumers using credit
from ‘unconstrained borrowing’, by implementing
stronger oversight on lenders’ products. We’re
seeing consumer borrowing extend beyond the
management of everyday living expenses, with
struggling consumers needlessly taking advantage
of the worrying number of takeaway delivery
companies incorporating BNPL into their array of
payment options.
This development is regarded by numerous
consumer analysts as carrying substantial risk,
potentially encouraging individuals to spend
beyond their means and steering them towards
using BNPL for desires rather than necessities,
where the ability to make repayments isn’t fully
considered.
Judgment call
It's important to strike the right balance on this.
On one side, it’s vital that consumers are protected
with providers being fully transparent about the
impact of using their products, therefore boosting
consumer understanding of the debt they are
incurring. Alternatively, the UK is keen on leading
the charge for innovation in financial services.
The UK wishes to develop a thriving market
while simultaneously upholding the interests of
consumers.
In difficult financial times, many individuals
resort to short-term credit. However, BNPL firms
must ensure that they aren’t contributing to
funding non-essential day-to-day expenses for the
young and vulnerable.
Providers must ask themselves: is the funding
we provide used for essential and affordable
consumer credit, or is it used for frivolities?
BNPL was created to spread payments of larger
purchases, not for accumulating daily spending.
There is a need for the sector to keep itself in
check in light of delayed regulation, it's imperative
that providers assess affordability to ensure that
vulnerable customers are not putting themselves
at greater financial risk by accumulating debt they
cannot repay. If providers remain on the same
path, the sector will find itself facing increased
scrutiny and distrust from responsible consumers
and the FCA alike. This in turn could lead to more
stringent regulation by a new government. Any
future regulation is likely to then be prohibitive
for the sector.
Heightened expectation
While not specific to the BNPL sector, the
introduction of Consumer Duty this July has
heightened what is expected of providers (and
other consumer-facing financial services firms)
in terms of ensuring that products offered to users
won’t push them into further financial harm. The
Duty is structured so it focusses on the outcome
for consumers, as opposed to clearly setting out
specific and prescriptive actions for firms to
follow), meaning providers must be extra vigilant.
In addition to the Consumer Duty, the review
of the Consumer Credit Act should make BNPL
providers take a serious look at the responsibilities
expected of them (alongside other financial
service firms catering to consumers), ensuring
that the products offered to consumers do not
exacerbate their financial vulnerabilities.
The overall view is that over time, the provisions
of the FCA/handbook/CCA will be applicable to
BNPL credit agreements. The Government needs
to adopt a careful and proportionate course of
action to guarantee the availability of this vital
credit format for those who need it.
The capability to secure loans has been affected
by growing interest rates and the economic
difficulties faced in the UK for recent years. At
the same time however, this form of credit cannot
serve as a means to finance irresponsible lifestyle
aspirations.
Considering the forthcoming changes to
Consumer Credit law, the financial services
sector should subject itself to close scrutiny. The
best solution is likely to align this in greater detail
with the FCA's consumer duty, albeit with a less
stringent regulatory approach.
As for the incoming sector-specific regulation,
this may have been delayed but this won’t be
indefinite – particularly with campaigners like
Martin Lewis calling for increased consumer
protections surrounding Buy Now, Pay Later. Any
regulation must ensure consumers are protected
whilst at the same time continuing to foster
market innovation, competition and consumer
choice.
Ensuring Consumers remain free from harm
is also integral to the Consumer Duty, and this
should be the primary approach when it comes to
providing BNPL credit.
Eddie Flanagan is a Partner at Shakespeare
Martineau.
The Government needs to adopt
a careful and proportionate
course of action to guarantee the
availability of this vital credit
format for those who need it.
Brave | Curious | Resilient / www.cicm.com / September 2023 / PAGE 23