What is the fate of unregulated BNPLs amid global crackdowns?

By Puja Sharma

Buy-now-pay-later firms will be clamped down on, and consumers will benefit from stronger protection, as the UK government launched long-awaited regulations for the sector. Under the new proposals, the Financial Conduct Authority would regulate buy now, pay later (BNPL) products, and the Financial Ombudsman would review complaints by consumers.

According to the Guardian, The rules that BNPL providers, such as well-known firms like Klarna, Clearpay, and Laybuy, would have to follow will be outlined in the eight-week consultation that begins on Tuesday. These rules will include the details of the information that providers must provide to customers regarding their loans.

The UK government estimates, new regulations may shield roughly 10 million consumers from “unrestrained borrowing”. Even though most consumers do not pay interest on their purchases, activists have cautioned that consumers still run the risk of becoming indebted and are not entitled to forbearance or compensation should something go wrong because these companies are not yet regulated in the UK.

Martin Lewis and other consumer advocates have expressed their dissatisfaction with the “painfully slow” pace of progress on regulating BNPL, which was generally anticipated to take effect in 2024. When the rules would go into effect was not specified in the official release.

“For years we have been warning about the dangers of buy now, pay later loans and the need to act before these legal loan sharks become the next Wonga-style crisis,” said Labour MP Stella Creasy, who has been pushing for more regulation of BNPL companies. The government must speed up the required regulation now that it has finally agreed to appoint the ombudsman because millions more individuals owe money to these businesses. We cannot give these exploitative businesses another year to operate.

The next stage after the new consultation will be legislation. In June last year, the government said lenders would be required to carry out checks to make sure loans are affordable for consumers, and financial promotion rules would be amended to ensure BNPL advertisements are fair, clear, and not misleading.

Commenting on the consultation launch of the UK Government’s proposals for the Buy Now Pay Later sector, Head of Partnerships at fintech BR-DGE Tom Voaden said, “The consultation launch will be welcomed by those closely watching the UK’s Buy Now Pay Later regulatory debate. It is a positive step and will lead to greater clarity for Buy Now Pay Later providers around their future responsibilities and, in turn, encourage the further acceleration of the sector.

“That said, it is clear that consumers need greater support during the cost-of-living crisis. Forward-thinking BNPL providers should put their best foot forward and consider what steps they can take to support customers before any regulation takes effect. This could be through adapting their checkout experience to better signpost repayment terms, supporting related consumer education initiatives, or working more closely with UK Credit Reference Agencies.

“Those market players that take a consumer-first approach will be in a stronger position to navigate their new set of responsibilities and reinforce their credibility in an ever-competitive market.”

Simultaneously, to crack down on unregulated BNPL apps in India, the Reserve Bank of India (RBI) provided the government with a list of lending apps that were deemed unregulated. According to RBI governor Shaktikanta Das, the apps removed were not maintained by regulated entities and were not appointed by nonbanking finance companies (NBFCs).

In response to the government’s crackdown on illegal online lenders, fintech apps like Kissht and PayU’s LazyPay have been blocked by the government. “The ministry requested that non-regulated apps be removed,” RBI deputy governor R Rajeshwar Rao said at a press conference following the policy announcement. We have not banned any digital lending apps. We have asked the regulated non-banking finance companies to share with us a list of the apps that they use. We have shared this list with the finance ministry.

According to lenders, the RBI is ensuring accountability by doing this. There have been allegations that many digital lenders use unethical practices to recover loans. Following a couple of cases in which borrowers committed suicide after being harassed by digital lenders, the RBI reviewed its digital lending norms.