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After a two-year wait, the UK government has published draft legislation that would bring buy-now, pay-later (BNPL) products under the regulation of the Financial Conduct Authority (FCA).
The draft legislation, published alongside a new consultation, brings to an end a waiting period that began in February 2021, when the government first announced its intention to regulate the BNPL sector.
The consultation, which will be open until April 11, aims to enable affected parties to give feedback on the government’s plans to bring BNPL products into the remit of the FCA.
At present, due to an exemption provided to interest-free credit agreements, BNPL has remained unregulated, despite almost one third of UK adults having used BNPL at least once, according to data from Equifax.
Previously the FCA has intervened in the BNPL market where it has seen evidence of consumer detriment, but BNPL has avoided the same scrutiny traditional credit firms and brokers have faced.
Once the government has reviewed the consultation feedback, it will consider any necessary changes to the draft legislation and will publish a consultation response.
Following that, the government plans to introduce the final legislation to parliament in 2023.
As new legislation approaches, the government said it is “reassured” that BNPL lenders will have a strong incentive to treat customers fairly and prepare their business models ahead of regulation.
What will be regulated?
As per the consultation, the proposed BNPL framework will apply to all credit agreements that meet the following key criteria:
1) The credit agreement must be interest-free and repayable in 12 or fewer instalments over a period of 12 months or less.
2) The credit must be provided by a person or entity that is not the provider of goods or services that the credit agreement finances.
In other words, merchants who offer “pay in instalments” arrangements directly to their own customers would be exempt from the regulations.
The government said it made this distinction based on the low potential for consumer detriment when credit is offered directly from merchants to consumers.
The government is of the view that including such merchants within the scope of BNPL regulation could be “disproportionate”, and could potentially lead to them discontinuing “useful” and “low-risk” instalment options due to the higher regulatory burden.
Out of all the responses it received to its previous consultation on BNPL regulation, published in October 2021, the government said only one respondent had backed the idea of including merchant-offered credit in the new framework.
Elsewhere in the consultation, the government reiterated its position that BNPL’s potential for consumer detriment can be attributed to the lack of “transactional friction” between consumers and third-party lenders.
“The potential risks have only emerged since the emergence of the BNPL business model where a third-party lender is involved, which takes on credit risk and provides a frictionless means of accessing credit across multiple merchants,” the consultation notes.
The government added that this view is shared by stakeholders, including the view that consumer detriment has increased since the exemption for interest-free credit was expanded from four payments to 12 in 2015.
As a result, third-party lenders offering BNPL agreements will need to be authorised and regulated by the FCA, and will need to comply with the regulatory controls that will apply under the government's proposed framework.
FCA steps in
Following the publication of the government's response to its current consultation, the FCA will publish a consultation on its proposed rules for firms.
To allow sufficient time for firms to meet the requirements of the forthcoming FCA rules, the government intends to impose a “transition period” that will begin on “regulation day”, when the new legislation will come into effect.
On that day, all new BNPL agreements must comply with the new rules, but pre-existing agreements may continue unchanged.
This “temporary permissions regime” (TPR) is designed to allow firms to make necessary changes to their business models before seeking full FCA authorisation.
Any firm that has not registered for the TPR prior to regulation day, and which does not have the appropriate authorisation, will not be able to provide BNPL services on or after regulation day.
Other key points
The consultation also notes that, under the proposed framework, all advertising and promotions of newly-regulated BNPL agreements would fall within the financial promotions regime overseen by the FCA.
Similarly, the jurisdiction of the Financial Ombudsman Service would be expanded to cover newly-regulated agreements, offering an added layer of protection to consumers.
