The Financial Conduct Authority (“FCA”) has warned firms which offer Buy Now Pay Later (“BNPL”) products that although some agreements are unregulated, the financial promotions of all BNPL products must comply with the financial promotion rules.
BNPL is a type of short-term finance (e.g less than 12 months and 12 instalments) which allows consumers to make purchases and pay for them at a future date. Usually offered at the point of sale, BNPL arrangements have become increasingly popular payment option, especially when shopping online.
Currently, many types of BNPL agreements are exempt under Article 60F(2) of the Regulated Activities Order (SI 2001/544). However, in 2021 HM Treasury (‘HMT’) published the eagerly awaited consultation BNPL. A careful analysis of the consultation paper revealed that HM Treasury seeks to introduce a regulatory regime for BNPL products that strikes a balance between consumer protection (i.e. the need to secure an appropriate degree of protection for users of BNPL) and effective competition (i.e.to not stifle innovation in the consumer credit market nor to cause unintended negative economic consequences for merchants/retailers that use BNPL). The FCA have warned firms that whilst lenders and merchants do not need to be authorised by the FCA to enter into BNPL agreements, the financial promotions of those unregulated/exempt agreements must still comply with certain regulatory requirements depending on who is communicating or approving the promotion.
A financial promotion is defined as ‘an invitation or inducement to enter into an agreement’. This means that a financial promotion for BNPL is any form of communication made across any media in the course of business, that invites a consumer to purchase a good or service by entering into a BNPL agreement. Commonly, this includes but is not limited to posters/leaflets, online advertising and social media posts.
Authorised firms selling unregulated or exempt BNPL products must comply with the relevant rules unless an exemption applies. This includes that their BNPL financial promotions must be clear, fair, and not misleading.
The FCA has raised concerns that consumers could be misled if BNPL financial promotions do not comply. The regulator has cited examples they have seen which do not emphasise the benefits of BNPL products without fair and prominent warnings of any risks to customers, such as:
- the risk of taking on debt that customers cannot afford to repay
- the consequences of missed payments
- any other adverse consequences such as the impact on the customer’s credit file
- information about when charges become payable
The FCA have also raised concerns BNPL promotions may be encouraging impulse buying.
Financial promotions rules are set out with the Consumer Credit sourcebook (‘CONC’) in the FCA Handbook. These rules include;
- Financial promotions must be balanced, and, in particular, do not emphasise any potential benefits of entering into an exempt BNPL agreement without also giving a fair and prominent indication of any relevant risks;
- Financial promotions must be sufficient for, and presented in a way that is likely to be understood by, the average member of the group to which it is directed, or by which it is likely to be received; and
- Financial promotions must not disguise, omit, diminish, or obscure important information, statements, or warnings.
Although the FCA does not yet regulate BNPL products it has been proactively addressing concerns about potential harm to consumers.
The FCA recently held a roundtable with BNPL providers to discuss upcoming regulation and called on firms to do more to support borrowers in financial difficulty, including signposting to money guidance and debt advice.
Earlier this year the FCA worked with BNPL firms to secure changes to potentially unfair and unclear terms in BNPL contracts using powers under the Consumer Rights Act.
The FCA is continuing to engage with BNPL providers and are proactively monitoring the market to ensure expectations are met. The FCA has confirmed it will use criminal and regulatory enforcement powers if it sees promotions that do not comply. So far this year, FCA action against firms that have breached its rules have led to 4,226 promotions