Buy Now Pay Later (BNPL) is a fast-growing payment method in the UK. Research has shown that consumers who use BNPL are more likely to be in financial difficulty and as such, the Financial Conduct Authority (FCA) is seeking to protect consumers (particularly those that are vulnerable) by ensuring that contract terms are fair, consumers are given sufficient information and that they have adequate protections that would be expected from other loan agreements.
The government plans to bring currently unregulated BNPL products under FCA oversight through new legislation. Following the consultation period ending on 29 November 2024, the regulation is expected to take effect 12 months after parliamentary approval.
As the Government moves towards bringing BNPL products within the regulatory perimeter, businesses must stay ahead of the curve. Our Financial Services Regulation lawyers are ready to guide you through the process of considering whether you need to apply for FCA authorisation.
Contents:
- What is buy now pay later credit?
- How does BNPL work for BNPL providers?
- Which BNPL products are regulated?
- Which BNPL loans are unregulated?
- What may future regulation look like?
- What to consider ahead of the proposed regulation
- How would the proposed regulations affect businesses?
- What other legal obligations would you need to consider?
What is buy now pay later credit?
BNPL refers to interest-free instalment credit which allows consumers to purchase products without having to pay the full amount up front. The purchases are financed by a third-party BNPL provider, and the merchant typically receives payment instantly. BNPL credit allows the consumer to split the cost of the purchases into regular payments over a period not exceeding 12 months. These services are frequently used by e-commerce businesses to encourage larger purchases and reach new customers.
Previously, firms providing these agreements did not need to be authorised by the FCA or comply with the Consumer Credit Act 1974 (CCA), but, if the new proposed legislation comes into effect, it will bring these agreements under regulation, removing the exemption that currently makes such activity unregulated.
How does BNPL work for BNPL providers?
In general terms, the consumer places an order and selects BNPL at the checkout. BNPL providers like Zilch and Klarna may perform a soft credit check that does not affect the consumer’s credit rating.
The business delivers the items (whether goods or services or both) to the buyer and the BNPL provider pays the seller. The consumer pays the BNPL provider for the purchase in instalments. No fees are charged to consumers who pay their bills on time. Consumers who do not pay their bills on time may face a late fee, and their debt may be transferred to a debt collection company, subject to the terms of each agreement for BNPL credit.
Which BNPL products are regulated?
Unsecured consumer credit (i.e. a cash loan or other ‘financial accommodation’) is regulated under the CCA and the Financial Services and Markets Act 2000 (FSMA). Under the new proposals, BNPL agreements will also fall under FCA regulation, removing the previous exemption for interest-free credit products. Firms offering or investing in regulated credit agreements must be:
- Authorised by the FCA and comply with the relevant rules and regulatory obligations;
- Able to rely on an exclusion;
- Or be exempt.
If you plan to offer credit to customers, seek expert guidance on consumer credit authorisation requirements.
Which BNPL loans are unregulated?
Previously, there was an interest-free credit exemption that applied to BNPL where:
- The agreement was a borrower-lender-supplier agreement for a fixed sum;
- Payments were to be made within 12 months;
- No more than 12 payments were to be made; and
- No interest or other significant charges applied (though interest charges could arise for missing payments)
Under the new regulation, this exemption will no longer apply to BNPL agreements offered by third-party lenders, meaning these products will now be regulated by the FCA. However, certain types of merchant-provided BNPL will remain exempt.
What may future regulation look like?
The Government has proposed that regulation of BNPL should be proportionate to the risks such agreements present whilst also providing adequate consumer protection. The scope of the proposed new BNPL regulation will cover all BNPL agreements offered by third-party lenders, bringing them under FCA regulation. This is a significant shift from the previous framework, which left many BNPL products unregulated.
The Government considered regulating all BNPL agreements, including those provided directly by merchants, but has proposed to initially focus on regulating third-party lender agreements. Merchant-provided credit agreements, such as those directly offered by sellers, will remain exempt under the current proposals. This exemption is based on the view that merchant-provided credit agreements pose less risk of consumer detriment. However, the Government will monitor the market closely and may regulate merchant-provided BNPL products in the future if significant risks emerge. The proposed new regulatory regime includes the following:
- Small agreements – BNPL agreements under £50 will no longer be treated as "small agreements" under the CCA. This means that, if the legislation proceeds, BNPL agreements of any value will now be regulated, removing the previous exemption if provided by a third party.
- Pre-contractual disclosure – The pre-contractual disclosure requirements under the CCA would be disapplied to BNPL credit agreements. A proportionate FCA rules-based regime would be introduced instead. If the BNPL provider failed to comply with FCA rules, then the FCA could take action under its existing toolkit. Consumers will also be able to complain to the Financial Ombudsman Service (FOS) or claim damages under FMSA if they suffer loss as a result of non-compliance.
- Advertising and promotion – The advertising and promotion of newly regulated agreements will now fall under the financial promotions regime. Unauthorised merchants offering BNPL will now be required to obtain approval from an authorised firm for their promotions, ensuring that all advertising meets regulatory standards.
- Credit broking – BNPL agreements offered by unauthorised merchants will remain exempt from being treated as regulated credit broking activities, unless the merchant operates as a domestic premises supplier (e.g., offering BNPL directly in a consumer’s home). In those cases, the activity would be subject to regulation.
- Financial Ombudsman Service – Consumers will have the right to take complaints about BNPL providers to the Financial Ombudsman Service under the new regime.
What to consider ahead of the proposed regulation
If the Government proceeds as it has proposed, then third-party BNPL providers which are not currently authorised will need to be directly authorised by the FCA to enter into regulated credit agreements as lenders, as well as to exercise, or have the right to exercise, the lender’s rights and duties under a regulated credit agreement.
A Temporary Permissions Regime (TPR) is proposed during the transition period to enable firms to continue to operate until they can transfer to the new regulatory regime and seek full FCA authorisation. Firms in the TPR would be deemed authorised by the FCA and permitted to undertake the regulated activities relating to newly regulated BNPL agreements in compliance with the FCA rules. You would be able to use the TPR where:
- You have engaged in an activity that will become a regulated activity prior to the day the regulation would commence;
- You have registered for the TPR prior to the day the regulation would commence; and
- You have paid a non-refundable registration fee.
If you fail to register for the TPR by any deadline set by the FCA, then you would not be able to continue with the newly regulated activity from the day the regulation would commence.
Other things you should consider if the Government proceeds as it proposes include:
- Post contractual notices – Certain provisions on post-contractual notices in the CCA, such as Notices of Sums in Arrears and default notices, will be disapplied for BNPL agreements. However, the FCA will set new rules on how firms should engage with consumers in financial difficulty, including appropriate engagement methods rather than using rigid notices. It is expected that the FCA's new rules will focus on ensuring clear, timely, and useful information is provided to help consumers who are struggling to repay their agreements. This will include requirements for communications that reflect the specific nature of BNPL products.
- Financial Ombudsman Service – You would need to familiarise yourself with the FOS’ framework as it could have fundamental business model implications. You would also need to ensure that your complaints policies and procedures reflect the consumer’s right to complain, as FOS protection will now apply to BNPL agreements.
- Credit reporting – BNPL providers would be required to provide clear, consistent, and timely credit reporting of newly regulated agreements across the three main credit reference agencies. This reporting would assist lenders when assessing whether to lend to the consumer, so it would be important that you put in place adequate systems in place order to collate and extract that data which would need to be reported in a timely manner.
- New systems and processes – You would need to consider whether you need to develop new systems to assess customer affordability and credit risk. The FCA is expected to consult on the specific requirements for creditworthiness assessments under the new regulatory regime. These assessments will need to ensure that BNPL providers can responsibly evaluate a consumer’s ability to repay without causing financial distress.
How would the proposed regulations affect businesses?
As a business selling goods and services to consumers, the wider legal and regulatory framework would still be relevant such as consumer protection, financial promotion restrictions and anti-money laundering. It is important you are aware of how any new BNPL regulations would impact your business. For instance, advertising BNPL products will now fall under the FCA’s financial promotions regime, requiring unauthorised merchants to have their promotions approved by authorised firms.
What other legal obligations would you need to consider?
If the government proceeds as it has proposed, then you should review the regulations that sit alongside the new BNPL regime. These include the financial promotions regime, as well as the FCA’s Consumer Duty, which deals with, amongst other things, consumer credit, and the consumer’s ability to understand the potential risks of products into which they are entering. Under the new BNPL regime, the Consumer Duty is intended to play a key role in ensuring that communications are clear, fair, and not misleading and that firms act to deliver good outcomes for retail customers.
As you start to prepare for the proposed new BNPL regime you should keep an eye on the FCA’s website to stay abreast of the changes that are being implemented and seek legal guidance where necessary.
