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DIFC to regulate ‘buy now pay later’ products

The Dubai International Financial Centre (DIFC) has proposed making ‘buy now pay later’ (BNPL) services a regulated financial service activity, meaning that service providers would need to apply for a licence to operate there.

The Dubai Financial Services Authority (DFSA), which operates in the DIFC, clarified its position on BNPL services in a recent consultation paper (6-page / 334KB PDF). The consultation paper seeks to address several regulatory concerns around the offering of BNPL products in and from the DIFC, such as a lack of customer education and the ease and manner in which these products are being promoted and provided.

To mitigate these issues, the regulator has proposed amending the current financial services activity of “providing credit” to expressly include those who finance the purchase of goods and services, bringing BNPL providers firmly in scope of the DFSA’s regulatory regime.

Pinsent Masons’ legal expert Barkha Doshi said that the clarification is much needed as BNPL services gain popularity in the region.

“The development and marketing of BNPL products have resulted in these arrangements becoming increasingly popular in the Middle East. Whilst most BNPL service providers active in this area consider that their business does not need to be regulated, DFSA has removed any possibility of doubt and has proposed to amend the financial services activity ‘providing credit’ and clarified its stance that this activity includes BNPL providers who finance the purchase of goods or services,” she said.

Following the proposed amendments, firms wishing to provide BNPL services in or from the DIFC would require a licence from the DFSA.

In an explainer note (3-page / 265KB PDF) published in August 2022, DFSA listed its main concerns about unregulated BNPL services. The concern over customers’ tendency not to view BNPL as a form of borrowing and so do not see the risks associated with predict provision and the consequences if they are not able to make repayments is one example. BNPL providers’ failure to conduct proper affordability checks on customers and inconsistent spending limits in the sector, as well as the lack of protection on the interests of customers during the marketing and advertising process, are some of the other concerns.  

DIFC is not the only jurisdiction in the Middle East to impose a licence requirement on BNPL providers.

“Last year, Saudi Central Bank had also published guidelines emphasising the need for the service providers to obtain a permit before engaging in the BNPL activity in the Kingdom,” said Doshi.

In many jurisdictions, BNPL providers still fall outside the scope of different regulatory regimes, particularly consumer credit regimes, and thus may be unregulated. The proposal by the DFSA is expected to pave the way for changes in other jurisdictions such as Australia and the UK, where discussions of bringing BNPL products within the scope of their respective regulatory frameworks are still in initial phases.

The public consultation on the changes closed on 7 December 2022. The DFSA is in the process of making the relevant changes to the DFSA Rulebook by taking into consideration the points raised in the consultation.

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