FCA set to regulate ‘buy now pay later’ payment products in UK

The draft legislation, published by the UK Treasury, follows a two-year consultation process. It would give the FCA the power to regulate firms offering certain types of interest-free instalment credit to consumers, responding to concerns over the risk of consumer harm of the unsecured credit market. Most BNPL firms and products are currently unregulated, and borrowers do not benefit from the consumer protections lenders are required to build into regulated consumer lending products.

Under the proposed regulatory regime, lenders offering BNPL products would need to be authorised by the financial regulator and would need to comply with various regulatory requirements and consumer credit rules, including the upcoming Consumer Duty and financial promotions regime. The FCA would be able to take enforcement action against any firms that have breached its rules.

The draft legislation would significantly widen the FCA’s remit and indicates the direction of travel for consumer credit reforms more broadly, according to financial regulation experts at Pinsent Masons.

Hannah Ross said: “The consultation reflects over two years’ work in this area by the Treasury and the FCA. It will bolster the FCA’s work to better protect vulnerable customers and support its recent monitoring of BNPL firms and interventions, in particular in the areas of financial promotions and treating customers fairly”.

“The proposed new legislative powers will significantly widen the FCA’s remit and BNPL firms should consider the legal, regulatory and commercial impact arising from these proposed changes. This will include consideration of how BNPL firms can and should be complying with the upcoming Consumer Duty, ensuring they deliver good outcomes for BNPL retail customers,” she said.

The proposed rules also increase the jurisdiction of the Financial Ombudsman Service (FOS) to resolve consumer complaints. Although FOS protection in this area is a welcome development, said Ross, she added that there were questions around how the service would be able to cope with a potentially increased number of complaints.

“The FOS may need to be provided with sufficient additional resource so that its ability more generally to resolve complaints promptly is not impacted,” she said.

Rachael Preston of Pinsent Masons said that there were some differences between the proposals previously set out by the Treasury for consultation and the draft legislation. The changes “reflect the FCA’s purposive approach”, she said.

“The previous proposal to create different sets of rules depending on whether an agreement was sold in-person, online or at a distance would have undoubtedly resulted in operational complexities, compliance issues and ultimately a greater risk of customer confusion,” she said. “Suppliers can breathe a sigh of relief at the FCA’s decision to drop this proposal and opt for a more purposive approach to the changes.”

“The draft rules on BNPL regulation provide a valuable insight into the direction of travel for consumer credit reforms more broadly. Let’s hope these changes are just the start of a new era of proportionate and pragmatic regulation which aims to strike the balance between consumer protection and competition and innovation in the market,” she said.

The government proposes to put a transition period of two years in place, to allow the FCA to finalise its rules for the new regulatory regime and for firms to make the necessary changes to their business models.