Government consults on regulation of Buy-Now Pay-Later products

In 2021, HM Treasury announced its intention to regulate certain unregulated buy-now pay-later (BNPL) products in the UK.

This followed recommendations made in the Woolard Review which raised concerns about the increased use of BNPL products during the pandemic and the significant risk that these unregulated credit products could cause consumer harm.

The government initially consulted on policy options to deliver a proportionate approach to regulation, and then consulted in 2023 on draft legislation to bring BNPL within the regulatory perimeter. Building on this work, the new Labour government has now launched a third consultation setting out its plans and draft legislation for regulating the BNPL market. The FCA has welcomed the government's consultation.

Draft legislation

The consultation sets out the government's position in various key areas covered in the draft legislation. These include scope, disclosure requirements and a Temporary Permissions Regime (TPR).

Scope of regulation

The government has largely decided to follow the approach of the previous government by limiting the scope of regulation in the first instance to agreements offered by third-party lenders. This means that agreements provided directly by merchants (i.e. the provider of the goods and services that the agreement finances) will continue to be exempt under Article 60F(2) RAO.

To bring third-party agreements within scope of regulation, the government proposes to add a new category of regulated agreement – a Regulated Deferred Payment Credit (DPC) Agreement – that would not be subject to the Article 60F(2) exemption. The draft legislation published alongside the consultation creates three new regulated activities in respect of regulated DPC agreements:

• entering into a regulated DPC agreement as lender
• exercising, or having the right to exercise, the lender's rights and duties under a regulated DPC agreement
• credit broking (for domestic premises suppliers that offer newly regulated agreements)

Although the immediate focus is on third-party DPCs, the government intends to monitor developments in the merchant-provided credit sector closely and will act if it sees evidence of substantial growth in that market or significant potential for consumer harm.

Other exemptions

The draft legislation specifically aims to preserve the Article 60F(2) exemption for certain arrangements that are not considered to present a substantive risk of consumer harm. These are set out in the proposed Article 60F(7B) RAO and include agreements financing contracts of insurance, registered social landlords and employer/employee lending.

Information requirements

One of the key principles driving the government's approach to regulation of BNPL is that consumers must have access to simple, clear, understandable and accessible information. The government intends for the FCA to develop an information disclosure regime in line with the Consumer Duty and therefore the information requirements applicable to BNPL will be set out in the FCA Handbook, rather than the Consumer Credit Act 1974 (CCA).¹ This means that various CCA provisions will be disapplied for BNPL, including the requirement to provide pre-contract credit information and the provisions governing arrears, default and termination notices.

When developing its rules, the FCA will also consider the suitability of the existing Consumer Credit sourcebook requirements for BNPL lending and whether further rules are appropriate.

Temporary permissions regime (TPR)

The government intends to introduce a TPR to allow unauthorised firms to continue to operate their BNPL lending until their application for full authorisation has been processed. In order to enter the TPR, firms will have to have (i) already been engaged in the BNPL activity at the date when the FCA is permitted to set up the TPR, (ii) registered for the TPR and (iii) paid the FCA registration fee. Firms will then be able to use the TPR until their authorisation application has been approved, refused, withdrawn, or if they fail to apply within their designated landing slot.

Other regulatory controls

Although not covered in the draft legislation, the government intends for the following existing consumer protections to apply to newly regulated BNPL agreements:

• Section 75 CCA
• Creditworthiness and affordability assessments
• Credit reporting
• Financial Ombudsman Service

What's next?

The consultation closes on 29 November 2024 and responses should be submitted to BuyNowPayLater@hmtreasury.gov.uk. The government will then look to publish its final policy position before bringing forward legislation as soon as parliamentary time allows.

The FCA will then consult on its detailed rules, publish its final rules and open registration for the TPR. There will be a period between final rules and 'Regulation Day' for firms to finish preparing and to update practices and processes. The FCA has made it clear that it will be engaging with firms that it expects to be authorised very soon. Firms will then be subject to full regulation 12 months after the legislation is made.