Regulator takes action on Buy-Now-Pay-Later

According to the  Woolard Review, (which was commissioned by the FCA to review the unsecured credit market and published in February 2021), the total value of transactions for Buy-Now-Pay-Later (BNPL) firms from January to December 2020 was £2.7 billion, being around 1% of the credit market. Whilst it may seem like BNPL is a small part of the overall market, the concern is the speed at which BNPL has got to this position and there is no evidence of the rapid growth in consumer use of these products slowing down. Here we look at what the Government and the FCA are proposing, as they look to bring BNPL products into the regulated space.

The report considered there to be “a significant risk” of harm to consumers when accessing BNPL credit. These included:

• The inappropriate promotion of BNPL to consumers.
• Poor consumer understanding of the product – a lack of understanding that they BNPL products are a credit offering.
• Lack of affordability assessments of these products.
• Inconsistent treatment of customers in financial difficulty by BNPL firms.

Many BNPL products do not need FCA authorisation and the FCA’s regulatory rules do not apply, as a result of an exclusion[1] that allows credit providers to offer interest free credit that is paid back in 12 instalments or less, within 12 months.

This type of ‘short-term interest free credit’’ is available via many online retailers, through well-known names such as Klarna and Clearpay.

The Government announced its intention to regulate BNPL products following the Woolard review and published a consultation in October 2021, establishing a ‘proposed proportionate approach to regulation’.

In its statement ‘FCA drives changes to Buy Now, Pay Later (BNPL) firms’ contract terms’, in February 2022, the FCA summarised the work already being done involving four firms (Clearplay, Klarna, Laybuy and Openpay) regarding the concerns raised. They acknowledged that although currently unregulated, these firms had ‘fully cooperated’ with their work by making changes such as amendments to the terms of their contract and refunding existing customers who had been wrongly charged for late payment fees in the past.

What are the proposed changes?

HM Treasury more recently published its consultation response in June 2022, which sets out the scope of regulation, which, it says ‘is set to protect millions of people’.

One of the major concerns is that consumers simply do not understand what they’re signing up to when using BNPL products, with consumer bodies finding that a large proportion of people consider BNPL to be a “money management tool” instead of a loan.

The Government has recognised the need for innovation in the credit market, with Economic Secretary to the Treasury John Glen saying there was a need to “embrace new products and services with the appropriate protections in place.” With this in mind, the Government’s proposal includes the following:

• Regulation of domestic premises suppliers (firms who visit customers in their own homes).
• Regulation of financial promotions where sellers are offering BNPL, which will require approval from an authorised person.
• BNPL products will need to incorporate pre-contractual information for the consumer, to make clear the financial obligation they are entering into.
• Application of Consumer Credit Act 1974 (“CCA”) obligations to BNPL products, including Section 75, which enables a consumer to raise a claim against their credit provider for goods and services bought on credit (although these obligations could be subject to change).
• The Financial Ombudsman Service jurisdiction will include BNPL contracts.

When are the changes expected?

Following the Government’s consultation response, draft legislation and further consultation should arrive by the end of the year with secondary legislation scheduled for mid-2023.

In the meantime, the FCA has issued a Dear CEO letter to lending firms that it regulates, discussing supporting consumers with the rising cost of living. The letter specifically refers to regulated firms offering unregulated BNPL products, asking them to follow the guidance they have set out, even though the products are not yet within the FCA’s supervisory reach. This demonstrates the FCA’s appetite for the regulation of BNPL firms and could be viewed as a preview of what is to come for firms offering these products, even before implementation of the new regime.

Next steps?

The timetable for the introduction of draft legislation to bring the changes into effect is slow. Martin Lewis, founder of consumer campaign group MoneySavingExpert.com has warned regulation of BNPL products is desperately needed and has described the process to legislation as “painfully slow”, with Alex Marsh, head of Klarna UK urging the government to “move quicker than planned to implement regulation”.

Once the legislation has been set out, the FCA will then consult on the new regime, with a transitional regime expected to be put in place, to help with acclimatisation for newly regulated firms.

At this early stage, BNPL firms should consider how their business model is likely to be affected and what changes may need to be made. If you would like to discuss the move to regulation of BNPL products and its impact on your business or if you are looking to become regulated, our Financial Services Regulatory team would be happy to speak with you and discuss your business needs.

[1] Article 60F of the Regulated Activities Order (60F(2)