The market for interest-free Buy Now Pay Later (BNPL) and other associated products, such as short-term interest-free credit (STIFC) has been growing at a searing pace.

Unsurprisingly, it has come to the attention of the regulators with respect to potential consumer detriment. This has only been magnified by the backdrop of the Financial Conduct Authority’s (FCA) implementation of the Consumer Duty, and of course the wider economic difficulties that we are all currently facing. This will surely mean this market and the products provided will come under increasing scrutiny as consumers are faced with making difficult decisions in relation to their finances and how to pay for everyday items.

Current Position

During the summer, the FCA wrote to firms advising that whilst BNPL agreements are not yet regulated, the promotion used to sell them must be in line with regulatory requirements.

The FCA’s warning was fairly candid: “Unauthorised firms might be committing a criminal offence if they don't have an FCA-authorised firm approve their financial promotions,” Adding that: “Authorised firms selling unregulated or exempt BNPL products must comply with the relevant rules unless an exemption applies. This includes that their BNPL financial promotions must be clear, fair and not misleading."

With such a candid warning to a market consisting of both FCA-authorised and non-authorised firms it is clear that the FCA is monitoring this market very closely. Highlighting this part of the legislation was presumably intended to make the whole market aware of its potential consequences. Specifically, if a promotion is not approved by an authorised firm that there is a risk of committing a criminal offence.

The motivation for the warning stems from concern the FCA holds around financial promotions in relation to BNPL and STIFC products. A financial promotion for a BNPL product is any form of communication made across any media in the course of business, which invites a consumer to purchase a good or service by entering a BNPL agreement. This includes marketing activities on websites, social media, paid for google ads, or messages from social media influencers.

Financial promotions under FCA rules are required to be balanced. This means they must give fair and prominent warnings of any risks to customers, including the consequences of missing payments and the potential impact on future credit scores. By not including these health warnings, there is a view that it could encourage impulse purchases which, by extension, would be irresponsible lending.

Requirements

Whilst there is no current requirement for lenders and merchants to be authorised to enter a BNPL agreement, there are regulatory requirements around financial promotions that do need to be adhered to. An FCA authorised firm when issuing a financial promotion must ensure that is fair, clear and not misleading. 

For an unauthorised firm to issue a promotion it must attain the approval of the promotion from an authorised firm. The requirement for it to be fair, clear, and not misleading would apply to the authorised firm providing the approval. Where unauthorised merchants are promoting BNPL products which are being provided by unauthorised lenders they should secure the approval of the promotion from an authorised firm.

Further Changes

This warning is being seen as the tip of the iceberg in relation to the BNPL market, and that more regulatory change will be coming in relation to this area.

The FCA and UK government intend to amend the scope of the current regulation to include BNPL and STIFC when they are provided by third-party lenders. This means that lenders offering these products will need to be approved by the FCA and required to undertake affordability checks to ensure loans are affordable for consumers. Product advertisements will become subject to the financial promotion regime. As with other consumer products, borrowers will be able to refer complaints about regulated BNPL and STIFC products to the Financial Ombudsman Service.

They will want to tailor and mirror the application of the Consumer Credit Act where possible to align lending practices. This could lead to BNPL lenders having to provide standardised information, such as APR and accompanying information sheets when promoting and/or providing a product.

The FCA have asked for stakeholder responses to further questions in relation to the STIFC market. This would indicate the intention to it bring within scope of the regulation STIFC provided directly by merchants where it is offered online, or at a distance.

Also, a second consultation paper from the government is expected before the end of the year, although this may be slightly delayed given the current economic and political uncertainty. It will be the precursor for secondary legislation in 2023, which will set out the scope and framework of the new requirements. The FCA will then have the opportunity to consult with stakeholders and agree the best way to regulate this.

The legislation and regulation around consumer products continues to increase, and with the Consumer Duty requirements the burden on lenders will only become more onerous. It is therefore vital that they keep updated of their obligations and requirements around what is expected of them in the UK market.