Consultant Zone

Buy now pay later products and RMBS concerns

The change in approach and increased level of anxiety regarding BNPL schemes is increasing. So why are RMBS investors becoming progressively more concerned?

1) The HM Treasury consultation on the regulation of BNPL schemes highlighted interesting growth statistics: the value of transactions from the main providers had more than tripled, 11% of consumers had used BNPL since the start of the COVID-19 pandemic (around 5 million individuals) and that an FCA review had identified the size of the market in 2020 at £2.7bn and growing rapidly, possibly doubling in 2021 alone.

2) A recent study found that 81% of UK adults were not aware that BNPL schemes were unregulated, and that half of the adults surveyed did not know that non-payments could be referred to debt collectors.

3) The continuing squeeze on household budgets, because of the increasing costs of living, means that more consumers are turning to short term credit to pay for everyday purchases.

4) Major clearing banks and fintech start-ups are forming strategic alliances that will inevitably extend the reach of these schemes to a wider range of consumers.

5) As the BNPL industry remains outside FCA regulation, the regulators’ power of influence is restricted to provisions in the Consumer Rights Act which limits their interventions to fairness and transparency of terms issues.

There is no doubt that the increased use of BNPL, coupled with increasing costs of living, is altering the affordability dynamic within existing RMBS portfolios. While lenders can adjust affordability assessments for new lending, and those investing in future issues can assess the investment with an updated perspective, holders of existing portfolios do not have this luxury.

BNPL will eventually be bought into the regulatory perimeter, and this will lead to substantial changes to the way they are marketed and underwritten. In the meantime, investors in existing RMBS need to be aware of the tightening credit position and also need to ask their servicers challenging questions around their future strategies for BNPL schemes.

If you’d like to discuss our views, learn how we can help with your portfolio assessments and discuss how we can help you prepare for the inevitable uptick in defaults, give us a call.