On 17 October 2024, HM Treasury published its consultation on draft legislation for the regulation of buy now, pay later (BNPL) building on the consultations published in October 2021 and February 2023 under previous governments.
What is BNPL?
BNPL refers to a type of interest-free credit agreement, where borrowers can make repayments split across a period of up to 12 months. BNPL agreements are not currently regulated as they fall within an existing exemption under UK regulation.
BNPL is often more affordable than other credit products. Typically, BNPL is taken out in relation to online shopping where the consumers agreement is with a third-party lender. However, the Woolard Review identified several risks that BNPL poses to consumers, such as the absence of affordability assessments, and the risk of creating high levels of indebtedness. In light of these concerns, the Government is now consulting on draft legislation to bring BNPL into the scope of regulation.
What does the consultation propose?
- Broadly, the consultation proposes the following changes to the BNPL regime:
- introduce a new category of regulated credit agreement. The Regulated Deferred Payment Credit Agreement. This will capture BNPL agreements offered by third-party lenders;
- the existing BNPL exemption will therefore be limited to agreements that are provided by the merchant in the transaction;
- an anti-avoidance measure will be introduced to prevent third-party BNPL providers from structuring agreements so that they are technically the merchant in a transaction, that would otherwise enable them to rely on the exemption;
- information requirements will be set out by the FCA in its handbook rules;
- financial promotions made by unauthorised merchants offering third-party lender BNPL agreements will need to be approved by an authorised person;
- credit broking activities that relate to BNPL agreements will be excluded, unless the activity is carried out in the home of the customer;
- a Temporary Permissions Regime (TPR) will be put in place. This will allow unauthorised firms to operate BNPL lending until their application for full authorisation has been processed; and
- for firms that decide to cease operating in this sector, under the retained temporary permission they will be able to service their existing agreements.
Next steps
The consultation closes on 29 November 2024, and the Government will lay the necessary statutory instrument as soon as Parliamentary time allows.
The FCA has announced that it will consult on its proposed rules and approach to authorising firms shortly after the legislation has been finalised. The FCA expects to take on regulation of the sector 12 months after the legislation is made.