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HM Treasury is preparing for the future regulation of BNPL (buy-now-pay-later) products

January 7, 2022

What is happening to BNPL regulation?

In October 2021, HM Treasury published a consultation paper setting out the policy options to achieve a proportionate approach to the future regulation of BNPL (buy-now-pay-later) products.

This consultation paper is available to view here and it closed on 6 January 2022. Following the consultation, the Government will provide a summary of responses and will set out the next steps for its work on BNPL regulation.

BNPL is expanding fast, with a recent BBC report stating that more than 17 million UK customers have used a BNPL company to make an online purchase and that certain established brands are poised to enter the market, while BNPL technology is evolving so that some brands can be used to make any purchase on any site.

What do you need to do?

In 2021, HM Treasury announced its intention to bring interest-free BNPL products within the FCA’s regulatory perimeter after the Woolard Review highlighted the probable risk of consumer detriment, as also noted in the Which? report referred to below.

The consultation paper is intended to ensure that the scope of regulation is aligned as closely as possible to target products where there is potential for consumer harm and it seeks views on a range of regulatory controls that could be put in place for BNPL regulation. Short-term interest-free credit arrangements are expected to be excluded from this.

The Which? report – January 2022

Drawing on interviews with 30 consumers who had used BNPL products in the last 12 months, this policy report explores when, why and how consumers use BNPL products in order to gain a better understanding of the potential risks consumers face in this market, thus allowing Which? to make recommendations for the design of forthcoming regulation.

The two key risks to consumers that the report identified are;

A lack of understanding of the product.

Most participants thought of BNPL as a way of spreading payments, not as a form of borrowing. When prompted, BNPL users understood that the product was a form of credit, but this was not how they conceptualised it for themselves.

This misunderstanding arose from the speed and simplicity of using the product, consumers’ low engagement with terms and conditions, and an implicit assumption that safeguards were in place and that the product was regulated.

Affordability risks

Throughout the research Which? identified a lack of engagement by consumers with the prospect that they might struggle to repay the agreement. Behavioural biases make it difficult for consumers to accurately assess the affordability of borrowing, and without proper assessments from lenders this creates risk, particularly given the challenging circumstances many BNPL borrowers are in.

Credit Broking

Brokers of BNPL products and other short-term interest-free agreements are not currently “credit broking” because broking such agreements is not within the regulatory perimeter. This could change when BNPL becomes regulated.

Future BNPL regulation could be accompanied by an exemption to ensure merchants (who are often sole traders or micro-SMEs) broking BNPL would not lead to the merchant having to be authorised by the FCA as a credit broker. This exemption would not apply to merchants carrying on this activity in customers’ homes.

Financial Promotions

Promotions of BNPL agreements will fall within the financial promotions regime. The Government is seeking to amend the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 to this effect.

Merchants would need approval for BNPL promotions from an authorised person to try to reduce consumer detriment from merchants not themselves being regulated.

Pre-contractual information

It is proposed that firms will need to comply only with FCA rules in this area, allowing section 55 (disclosure of information) of the Consumer Credit Act 1974 to be disapplied. This is because section 55 contains detailed and inflexible requirements which are not appropriate to BNPL agreements, since

  1. The interest-free products are lower-risk,
  2. BNPL products are significantly smaller in size and duration than regulated consumer credit products (the average amount is £65 to £75), and
  3. BNPL agreements are likely to be entered into online and with much greater frequency, so there is a high risk that the customer will not engage with long and detailed information disclosures.

Credit Agreements

Mainstream consumer credit agreements are considered inappropriate for BNPL and so bespoke legislation may be necessary on the form and content requirements for BNPL, to better suit the features of the product and how it is used by consumers in practice.

Creditworthiness assessments and customers in financial difficulty

There is currently no requirement to carry out creditworthiness assessments (on credit risk and affordability) for new customers entering into BNPL agreements. The FCA’s rules on creditworthiness would be applied to BNPL agreements, with the FCA tailoring them to BNPL if necessary. The Government intends to include requirements around how firms treat customers in financial difficulty and around how BNPL agreements will be reflected on customers’ credit files.

Small Agreements

Small agreements are defined in section 17 of the Consumer Credit Act as regulated agreements for credit not exceeding £50, other than a hire-purchase or conditional sale agreements. Some parts of the CCA do not apply to small agreements and the Government is consulting on narrowing the scope of section 17 to ensure that CCA requirements apply to BNPL agreements under £50. This is because many BNPL agreements are for less than £50.

Section 75

Section 75 of the Consumer Credit Act 1974 makes a creditor jointly and severally liable in certain circumstances for a supplier’s breach of contract or for misrepresentations for goods or services. For section 75 to apply, the cost of the item or service purchased using the credit must be between £100 and £30,000. The Government is aware that some BNPL providers currently provide their own buyer protection schemes, but is currently of the view that statutory protection could apply as part of regulation of BNPL, so that it is in line with other regulated credit agreements.

Financial Ombudsman Service

The Government’s view is that proportionate regulation of BNPL should include the ability for consumers to access the FOS for issues concerning BNPL lenders’ conduct.

How can we help you?

If you’d like to know more about how we can help you with your BNPL regulation, or with any other regulatory compliance issues, our expert team is here to help.

Contact us today on 0207 436 0630 – or email