The UK government intends to regulate Buy Now Pay Later (BNPL) sometime this year when parliamentary time allows. The government stated that legislation aims to address the concerns of consumer detriment, misleading financial promotions and poor BNPL practices, while also ensuring that BNPL lenders treat customers fairly where they have been impacted by the cost-of-living crisis. This will result in more responsible BNPL products and would better balance innovation and consumer protection.
SCOPE OF REGULATION
The government’s view is that the scope of regulation should be limited to credit agreements that are offered by third-party lenders. It will not include other types of merchant-offered credit which are provided online or at a distance, such as payment of school fees, insurance, utility bills, subscriptions, etc. This will ensure that regulation is proportionate and does not restrict access to other necessary financial products.
With that in mind, the government has advised that the scope of regulation should be:
- BNPL agreements where the credit is provided by a third-party lender; and
- Interest-free agreements, repayable in 12 or fewer instalments within 12 months or less.
The impact is that third-party lenders offering these agreements will have to be authorised and regulated by the Financial Conduct Authority (FCA) and comply with the regulatory controls.
IMPACT TO BNPL PROVIDERS
Once parliament approves the regulatory changes, and to comply with FCA regulations, BNPL lenders will have to ensure that their business models and operational processes are amended as necessary, and staff trained to support these changes. Technology and infrastructure changes may also be required to support data sharing and affordability checks, for those who don’t already do so.
The government has proposed the creation of a temporary permissions regime (TPR), which will allow firms to continue to operate until they are fully authorised by the FCA, provided they register within the FCA deadline. This will form a transition period in which to prepare for regulation and will allow registered firms to continue with the newly regulated activity on or after ‘regulation day’. Firms without a TPR on the day regulation begins will have to suspend operations until they get FCA approval.
In the meantime, businesses should think about how these proposed regulatory changes will impact them and start preparing, where possible.
KEY ASPECTS OF LEGISLATION
- Firms must register with the FCA for entry into the TPR by the deadline to be agreed before regulation day.
- Unregulated firms will have to register for FCA approval and should make the most of the time now to prepare.
- BNPL purchases will be protected under section 75 of the Consumer Credit Act. It would apply to all newly regulated agreements covering transactions between £100 and £30,000. BNPL lenders should get their processes and systems ready to support this change.
- BNPL providers will be required to follow advertising rules on financial promotion to ensure BNPL advertising is transparent, fair and not misleading. Promotional messages will have to be pre-approved by lenders and shared with merchants.
- Firms that haven’t already done so may need to upgrade their systems to support stronger credit and affordability checks or integrate with a partner to do this. Utilising open banking for real-time financial checks before approving lending agreements could enhance the process.
- The new legislation will give consumers increased protection and the right to complain to the Financial Ombudsman Service (FOS) if they are unhappy with the service they receive. Complaints procedures will have to be aligned with consumer lending guidelines.
THE BIG PICTURE
In February 2023, a consultation on the draft legislation was published, and this was subsequently closed on 11th April 2023. The government will now review the stakeholder feedback and consider any necessary changes to the draft legislation. Following which it will publish a response outlining the key milestones for regulation before taking it to parliament for approval. FCA consultation will be conducted separately, and the government has confirmed that FCA rules can be confirmed after parliamentary approval.
MORE SUSTAINABLE AND RESPONSIBLE
Early last year, I wrote a blog on the need for BNPL regulation, so it’s great to see the progress made, although it will take some time yet. I am convinced that bringing BNPL under regulation will lead to more sustainable and responsible products, providing the protection necessary to safeguard consumer detriment, especially for the more vulnerable. BNPL may have had a rocky ride, but it serves a purpose, and used appropriately, may be an instrument for financial inclusion for consumers struggling with the cost-of-living crisis, whilst also allowing businesses to operate this new, regulated model.