Introduction
On 17 October 2024, HM Treasury (HMT) issued a consultation paper (CP) which sets out the government’s approach to regulating buy now pay later (BNPL). This CP builds on HMT’s previous consultations that ran between February 2023 and April 2023.
HMT’s latest CP is accompanied by a draft statutory instrument (SI), The Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025, which would bring the new BNPL regime into force.
This short article explains some of the key implications for firms across the BNPL landscape, including retailers for whom BNPL is a critical point of sale payment method, and for the customers for whom it has become equally important as a payment method.
Major changes for the BNPL sector
Based on HMT’s consultation and the draft legislation, the major changes for the BNPL sector will be:
- Unregulated third party BNPL providers will need to obtain Financial Conduct Authority (FCA) authorisation and comply with FCA rules and guidance once authorised (though there will be a grandfathering regime, in a similar way to the interim permission regime for consumer credit when firms transitioned from the Office of Fair Trading (OFT) licensing to FCA authorisation).
- Lenders will be required to carry out affordability and creditworthiness assessments as a regulatory requirement, in accordance with FCA rules.
- Lenders will have to comply with new FCA rules for the provision of pre- and post-contractual information, and in respect of the credit agreement itself.
- Borrowers will have recourse to the Financial Ombudsman Service, and lenders may be subject to the FCA’s existing complaints handling rules.
- Lenders will be required to report to credit reference agencies in respect of the new regulated agreements.
- Borrowers will have recourse to the protections provided under s.75, Consumer Credit Act 1974 (CCA) where the credit agreements are above £100 (and below £30,000), which will place additional potential liabilities on lenders where there are issues with the services/goods provided by merchants.
- A number of the most significant CCA sanctions will be disapplied for this new regime, including the automatic disentitlement of interest that may arise in respect of certain post-contractual documents under the CCA.
Although HMT’s consultation has provided much greater shape to the proposed regulatory regime for BNPL providers, much has been left for the FCA to determine via its final rules (e.g. information requirements, nature of affordability assessments, ability to opt-in to the CCA requirements, etc). As such, it is likely that the full impact of the BNPL regime will not become clear until the FCA’s final rules are published in an upcoming consultation.
Notwithstanding this, the HMT consultation has ruled out any potential ambiguity over whether the BNPL sector would fall within the FCA’s regulatory perimeter. Third party BNPL lenders – who have already been under significant scrutiny from the FCA to date – will now need to upscale their operations to meet the FCA’s conditions for authorisation in order to sustain their BNPL operations in the medium-long term (i.e. beyond the temporary permissions regime).
It is expected that firms will need to have effective compliance functions in place given the FCA’s historic focus on financial promotions and unfair contract terms, which may therefore lead to additional scrutiny in any authorisation process on how firms they will provide good outcomes to their customers and comply with the Consumer Duty.
Regulated DPC Agreements
The new name for BNPL is here – a ‘regulated deferred payment credit agreement’. The scope for this new form of regulated agreement will be limited to deferred payment credit (DPC) agreements offered by third party lenders. This means that merchants offering credit to their customers will continue to be able to rely on the pre-existing ‘BNPL exemptions’ in Art.60F, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. By way of reminder, Art.60F broadly covers borrower-lender-supplier loans which are interest free and are either for a fixed amount and up to one year, or are for running account and last up to three months.
The scope of a regulated DPC agreement is intended to cover both the standard model for BNPL in the market, whereby third party lenders provide credit to a borrower to purchase goods from a merchant, and alternative models whereby the lender may purchase the relevant goods from the merchant and then provide these (alongside the credit arrangement) to the borrower. HMT has included anti-avoidance provisions within the draft SI to capture the different potential models for third party lenders within the BNPL market.
To CCA or not to CCA? That was the question
In the CP, the government had only proposed to disapply the pre-contractual information requirements within the CCA for regulated DPC agreements. However, in the CP (and draft SI), the government has decided to take a much more expansive approach – with a potential eye to the upcoming broader reform of the consumer credit regime – and exclude large portions of the CCA from applying to regulated DPC agreements.
For example, alongside the pre-contractual information requirements, prescriptive requirements under the CCA for the credit agreement itself, post-contractual information, arrears/defaults, early termination and variations will not apply to the new regulated DPC agreements. Importantly, this also means that some of the related sanctions under the CCA will also fall away (i.e. interest disentitlement for issues relating to annual statements/notices of sums in arrears). Notwithstanding this, certain key protections under the CCA have been retained – such as Time Orders and the unfair relationship provisions, which will continue to protect borrowers from egregious actions by lenders.
Instead, HMT will empower the FCA to create new rules (as it considers appropriate – alongside the existing provisions in the FCA’s Consumer Credit sourcebook (CONC)) for the provision of information to customers, and conduct requirements for this new regime. Although the government has been keen to stress that this regime will be tailored to what is appropriate for the BNPL market (and its specific characteristics), these new rules may provide some insight into the direction of travel for the wider consumer credit regime reforms.
Notwithstanding the broad swathe of CCA provisions that have been disapplied, it is important to note that the new regulated DPC agreements will otherwise fall within scope of the CCA. This means that other protections and requirements – such as s.75, reporting to credit agencies and affordability checks (under CONC) will now apply to these types of BNPL agreements.
Finally, HMT have also decided to disapply s.82, CCA which applied to variations of credit agreements. This move is likely to be welcomed by lenders as s.82, CCA is typically a complex area of law, which can pose significant operational issues for lenders when seeking to unilaterally vary agreements or provide forbearance to borrowers. The government considered that broader consumer law (i.e. Consumer Rights Act 2015) and FCA requirements (i.e. the Consumer Duty) will ultimately provide a sufficient layer of protection for borrowers in the event of any variations to the borrower/lender relationship given the nature of the BNPL agreements. We expect that lenders will be hoping that this approach is replicated in the upcoming HMT consultation on reforms to the consumer credit regime.
Three’s a crowd for existing regulated lenders?
At present, most existing lenders are likely to already have two different tracks for their consumer lending operations – regulated (i.e. within scope of the CCA) or unregulated. As such, whilst more flexible and outcomes focused, the new approach may not be entirely welcomed by existing lenders, as it may involve creating a third track and set of documentation in order to comply with the new regulated DPC agreement regime.
Interestingly, HMT declined to provide a mechanism within the draft SI for lenders to ‘opt’ regulated DPC customers up to the ‘full’ CCA regime. Instead, HMT has left this for the FCA to determine, as it sees fit (by making rules to implement this approach if necessary).
Whilst existing lenders will likely wish to see the form and nature of the new FCA rules for the regulated DPC regime, this may be one area of particular interest for them in the upcoming FCA consultation on this new regime.
Credit broking and financial promotions
HMT have retained their pre-existing approach for the scope of credit broking and financial promotions. Merchants will therefore not need to be authorised in order to effect introductions of their customers to third party lenders for regulated DPC agreements.
Equally, merchants may use financial promotions approved by third party DPC providers, but will need an authorised lender with the appropriate permissions to approve any of their bespoke promotions under the new financial promotions approval gateway.
Timelines and Temporary Permissions Regime
The government has confirmed that there will be new regulated activities of entering into, or exercising the rights of a lender for a DPC agreement. HMT are proposing to introduce a temporary permissions regime for firms in respect of these regulated activities.
The draft SI put forward by HMT includes an Initial Commencement Date (ICD) (to be determined by HMT, but which is likely to be in 2025 given the proposed desire to implement the regime as soon as possible). There will then be a 12 month period (as set out in the SI), which will run from the ICD, within which the FCA will need to consult on to make their rules for the new regulated DPC regime. Upon the expiry of this 12 month period (known as the ‘Regulation Day’), the DPC regime shall come into effect.
In order to qualify for the temporary permissions regime, firms will need to demonstrate that they are undertaking the relevant DPC activities at the ICD, have registered with the FCA and paid the relevant registration fees. Following the Regulation Day, firms will then be provided with ‘landing slots’ by the FCA for the full consideration of their authorisation to provide DPC agreements. Until the FCA reach a determination either way, the relevant firms will hold a ‘deemed Part 4A authorisation’, which shall allow them to approve their own financial promotions. This is similar to the approach used by the FCA for the temporary permission regimes used post-Brexit and for the transfer of credit from the OFT to the FCA.
HMT have proposed a two year backstop date for the temporary permissions regime, by which time firms should have either become authorised or exited the market. HMT have proposed a wind-down regime for such firms (bearing similarities to the Financial Services Contracts Regime utilised for firms exiting the UK following Brexit).
Next steps
The deadline for responses to the CP is 29 November 2024. Following, this all eyes will very much be on when the Government will lay the draft SI (and if any amendments are made to it or not), which will determine the ICD and Regulation Day for the new BNPL/DPC regime.
Given that HMT have delegated considerable discretion for the shape and form of the new regime to the FCA, whilst this consultation does significantly move the regulation of BNPL forwards, there is still much more detail to follow. This will be keenly awaited by both BNPL providers and wider participants in the consumer credit sector given its broader potential signposting for regulation in this market in the years ahead.