There has been disquiet about the easy availability of BNPL products for some years. Following a previous consultation, the UK government is consulting about its plans for regulating the BNPL market. It wants to ensure people using BNPL products receive clear information, avoid unaffordable borrowing, and have strong rights when issues arise. The government’s approach aims to maintain access to a popular product while adding safeguards.

The government’s approach has been informed by five key principles:

• Consumers must have access to simple, clear, understandable and accessible information;
• Consumers should have protection when things go wrong;
• Lenders should only extend credit to consumers if consumers can afford it;
• Regulation should be proportionate to ensure continued access and choice; and,
• Regulation must be introduced urgently to ensure consumers are protected and the sector has certainty.

Once implemented, the framework the government is proposing will deliver on these principles through the following outcomes:

• Clear information, in line with the FCA’s Consumer Duty: the government will disapply certain information requirements in the Consumer Credit Act 1974 (CCA), that could lead to poor consumer outcomes and the FCA will be able to use its powers to apply more appropriate disclosure requirements.
• Key statutory rights: consumers will benefit from key protections in the CCA, such as section 75.
• Independent complaints handling: the FCA will be able to set rules on complaints handling and consumers will be able to take complaints to the independent Financial Ombudsman Service.
• FCA supervisory oversight: BNPL firms will need authorisation from the FCA and will be subject to ongoing supervision. 
• Affordability and creditworthiness assessments: the FCA will be able to set appropriate rules on assessing affordability and creditworthiness, reducing the risk that borrowing is unaffordable.

The government intends to bring into regulation deferred payment agreements where they are offered by a third-party lender (meaning merchants offering such agreements will be out of scope, but when merchants introduce customers to a third-party lender will need their financial promotions approved for example by the lender, subject to special considerations during the period of application of the temporary permissions regime discussed further below). This will require firms to be FCA authorised to offer BNPL products and will allow the FCA to supervise and set rules for firms. Firms will also be subject to certain provisions of the CCA.

It is important that communications by BNPL lenders maximise consumer understanding. They should ensure consumers understand the product they are taking out, can keep track of their payments during the agreement, and that they are engaged with in a supportive manner if they face financial difficulty. 

The government believes that an information requirements regime based in FCA rules, drawing on the Consumer Duty, is the most effective way to achieve this. In the BNPL context certain provisions in the Consumer Credit Act are not relevant or necessary and/or may cause confusion for consumers if implemented. 

The government therefore intends to disapply certain information requirements in the CCA that could lead to poor consumer outcomes for BNPL agreements. The FCA will consult on bespoke rules aiming to ensure that users are given this information in a way that is tailored to the online setting in which BNPL products are generally used.   

The consultation ends on 29 November. After reviewing feedback, the government will bring forward legislation as soon as possible. The draft legislation sets a ‘Regulation Day’ which is 12 months from the legislation being made. In the intervening period, the FCA will consult upon and finalise new rules to apply from ‘Regulation Day’. During this period, there will also be a window for firms to register for the Temporary Permission Regime which allows unauthorised firms to continue to operate their BNPL lending until their application for full authorisation has been processed.

If you would like to read about the background on these changes, see here.