HM Treasury has published a consultation to bring Buy Now, Pay Later (BNPL) firms within the scope of FCA regulation. This has been a long time coming, with HM Treasury having already consulted twice on changes to the rules surrounding BNPL. Meanwhile, the FCA has been calling for BNPL firms to be brought within its regulatory remit since it backed the recommendations of the Woolard Review at the beginning of 2021.1 Now, the new Labour government is keen to "act urgently" and bring BNPL within the purview of the regulator, which will hopefully bring to a close a long period of uncertainty.
BNPL loans are a form of consumer credit that is exempt from many of the requirements that apply to regulated credit agreements, if it is interest-free and repayable in 12 payments or less and within a year or less.
The government is acting on a pre-election promise to better protect the millions of consumers who use BNPL agreements to spread the cost of purchases over time. These arrangements - which essentially involve taking on debt by consumers - are increasingly popular, but have seen many struggle with unmanageable debt. According to Citizens Advice, it has provided support to twice as many people struggling with BNPL-related debt so far this year as it did in 2022.2
In the wake of the Consumer Duty, it's a logical next step in consumer-focused regulation. BNPL poses a heightened risk to consumers because, in addition to being unregulated, it is disproportionately used by potentially vulnerable consumers. An FCA research note in 2023 found that 44% of the most frequent users of BNPL were over-indebted.3
There is also a wider context to the BNPL proposal, which is the broader but separate initiative to reform and modernise the Consumer Credit Act 1974 (CCA). This will be subject to a separate consultation and would likely require separate primary legislation. The reform to the CCA is not being advanced on the same timeline as the BNPL developments.
In short
Alongside its consultation, HM Treasury has published a draft statutory instrument which sets out some of the legislative changes it intends to make. The detailed rules will be drawn up by the FCA once legislation is finalised, but the headlines are:
- BNPL firms will need to be authorised by the FCA and will be subject to ongoing supervision;
- Brokers of newly-regulated BNPL agreements will not be subject to regulation unless they are domestic premises suppliers;
- New disclosure requirements so that consumers have access to clear information, in line with the Consumer Duty;
- Key statutory rights and other protections for consumers;
- Consumers will be able to make complaints to the Financial Ombudsman Service; and
- The FCA will require firms to carry out affordability and creditworthiness assessments of potential borrowers before providing credit.
Stakeholders will have to act quickly, as the consultation will close on 29 November 2024. The government aims to lay final legislation before Parliament in early 2025, after which the FCA will have 12 months to finalise the rules before they take effect in 2026.
We explore the proposals made in the consultation in greater detail below.
Scope of the new regime
It is not proposed that all BNPL agreements should fall within the scope of the new regulations.
The government believes that regulation should be limited to agreements offered by third-party lenders, and would not therefore encompass agreements entered into directly with providers of goods and services. Regulatory exemptions will also continue to be available for premium finance providers, registered social landlords and employers in respect of interest-free loan arrangements such as season ticket loans.
Proposals
- Clear information, in line with the Consumer Duty
A key underlying principle of the government's approach is that consumers should have access to simple, clear, understandable and accessible information to enable them to make informed decisions before entering into a credit agreement.
The government is of the view that applying the existing statutory regime under the CCA to BNPL agreements would not be conducive to this objective. This is because certain provisions are not relevant or necessary in the BNPL context and might cause confusion to consumers, or otherwise lead to poor consumer outcomes.
Instead, the FCA will develop its own modernised disclosure regime for BNPL agreements, in line with the Consumer Duty, which requires financial services firms to deliver good outcomes for retail consumers. It is expected that this regime will be based on the existing requirements set out in the Consumer Credit sourcebook (CONC), which the FCA will amend where necessary to make rules specific to BNPL agreements.
The following provisions of the CCA will be disapplied for BNPL agreements:
|
Category of information |
CCA provisions |
Comment |
|
Pre-contract information |
55, 55C |
Sections 55 and 55C on pre-contract credit information will be disapplied in favour of a "more consumer-focussed" regime. The key concern is that mandatory requirements for the form of information to be provided to consumers before contracting is not compatible with BNPL agreements, which are mostly accessed on mobile devices. Further, certain pre-contract information – for example relating to interest rates – is irrelevant to BNPL products. The consultation notes that the Consumer Rights Act 2015, CONC, and the FCA Principles (including the Consumer Duty) already require firms to provide "adequate explanations" which are "clear, fair and not misleading" of consumer credit products. The FCA will consider whether and how these provisions should apply to BNPL agreements, and whether further rules are needed. |
|
The agreement |
60, 61, 61A |
Under these provisions, mandatory key information must be provided to the consumer throughout the lifecycle of a regulated credit agreement, and a copy of the agreement must be provided. The government considers that these provisions are unlikely to be suitable for BNPL consumers and might lead to confusion and to information being provided at the wrong time, given the short duration of agreements. Consumers who enter into BNPL agreements can generally keep track of their payments through digital accounts, and the government feels that requiring lengthy documents and statements to be provided is unlikely to improve customer engagement. Instead, the FCA will consider as part of its regulatory regime how consumers can be best kept updated with developments in their BNPL agreement. It will keep in mind the Consumer Understanding outcome of the Consumer Duty, which requires firms to provide the information that consumers need, at the right time, and presented in a way they can understand. |
|
Copies and statements |
77, 77A, 77B |
|
|
Variations |
82 |
|
|
Early repayments |
97, 97A |
|
|
Arrears |
86B, 86E |
The government is particularly keen to ensure that consumers in financial difficulty are provided with clear, timely and useful information and are supported to find a suitable solution for their circumstances. The CCA requires information and notices to be sent to consumers where they are behind on repayments and/or where the lender wants to take enforcement action. The consultation sets out the ways in which CCA requirements are unsuited to BNPL agreements, with some notices having to be sent in paper form. Under the CCA, a consumer can apply to the court for a 'Time Order' to provide more time for payment, where they have been served with notices relating to default or arrears, all of which are being disapplied for the purposes of BNPL agreements. Instead, consumers will have the option to apply for a Time Order if they are informed that their lender intends to take certain enforcement action or terminate the agreement. This is in addition to other recently introduced consumer safeguards, such as the FCA's forbearance rules and government's Breathing Space (Debt Respite Scheme) which allows anyone experiencing problem debt to apply for a 60-day period in which enforcement action and interest and charges are frozen. As part of developing its regulatory regime, the FCA will consider whether it will need to supplement the existing sections of the Rulebook which deal with customers experiencing financial difficulty, including CONC and the Consumer Duty. |
|
Default and termination |
76, 87, 98, 103 |
- Key statutory rights
Section 75 of the CCA is a further important safeguard, giving consumers the right to claim a refund from their lender for any breach of contract or misrepresentation by the supplier of the goods or services. It will apply to newly-regulated BNPL agreements between £100 - £30,000.
- Independent complaints handling
The rules set out in the FCA's complaints handling rulebook will apply to regulated BNPL firms, and consumers will have the right to take their complaints to the Financial Ombudsman Service.
- FCA Supervisory oversight
Once the new rules come into force, BNPL lenders will have to seek authorisation from the FCA (subject to certain exemptions). This means that the FCA will be able to block unsuitable firms at the point of entry and sanction any non-compliance through ongoing supervision and monitoring.
The FCA will consider how its CONC sourcebook will apply to BNPL lenders, and whether any supplemental rules are needed. If a firm is alleged to have breached the rules set out in CONC, consumers will have a private right of action against lenders under s. 138D FSMA 2000.
As well as CONC, regulated BNPL lenders will be subject to the Consumer Duty and the FCA Principles for Businesses. As with any other FCA-authorised firm, breach of these rules can lead to the possibility of enhanced supervision and/or enforcement action by the FCA.
The rules on financial promotions will also apply to BNPL lenders, meaning that unauthorised firms (including firms authorised under the TPR – see more on this below), will need to obtain approval for the promotion of BNPL agreements from an authorised person with financial promotions permissions, unless a relevant exemption applies.
- Affordability and creditworthiness assessments
Whilst it remains to be seen exactly how the FCA's rules on creditworthiness will be applied to BNPL agreements, the FCA operates under the principle that money should only be lent to a consumer if they can afford to repay it.
Current consumer lending rules require firms to carry out a reasonable assessment of a prospective borrower's creditworthiness before lending to them, taking into account whether they will be able to repay affordably and without significantly affecting their broader financial circumstances. We expect that the FCA will apply a similar requirement to BNPL agreements, as one of the key policy objectives for this change is to prevent consumers from accumulating unmanageable debt.
Countdown to regulation
As these rules are being introduced as a matter of urgency, the FCA will operate a Temporary Permission Regime (TPR) allowing unauthorised firms that enter the TPR to continue to offer BNPL lending until their authorisation application has been processed by the FCA. In the interim, TPR firms will be deemed authorised under Part 4A of FSMA by the FCA, and will have to comply with FCA rules.
The FCA rules will therefore be introduced in two stages. The first stage will see the FCA consult on its new rules and set up the TPR. 12 months later, BNPL will become regulated and the new FCA rules will enter into force in 2026.
1. https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf
3. https://www.fca.org.uk/publication/research-notes/deferred-payment-credit.pdf
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