Regulation of Buy-Now Pay-Later: government publishes its response to consultation

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Introduction

On 20 June 2022, the government unveiled its approach to the regulation of interest-free buy-now pay-later (BNPL) products and other currently-exempt agreements (referred to as short-term interest-free credit (STIFC)).

This follows its consultation in October 2021 and the earlier Woolard Review (published in February 2021), which highlighted the potential risk of consumer detriment associated with BNPL products. For further background, please see our insight article.

How BNPL and STIFC will be regulated

The government intends to:

Amend the scope of regulation to include BNPL and STIFC when they are provided by third-party lenders. This means that lenders offering these products will need to be approved by the FCA and be required to undertake affordability checks to ensure loans are affordable for consumers. Product advertisements will become subject to the financial promotion regime and will need to be fair, clear and not misleading. In addition, borrowers will be able to refer complaints about regulated BNPL and STIFC products to the Financial Ombudsman Service.
Tailor the application of the Consumer Credit Act 1974 to these products, and the elements of lending practice most linked to potential consumer detriment.
Bring within scope STIFC provided directly by merchants where it is offered online or at a distance. However as the government does not fully understand the nature of the merchant-offered STIFC market, it has asked stakeholders to provide insights on the scale and operation of the STIFC market by Monday 1 August 2022.
Provide exemptions for specific arrangements where there is limited risk of potential consumer detriment, and where regulation would be disproportionate. The government therefore intends to ensure invoicing, interest-free agreements which finance contracts of insurance, charge cards, trade credit and most forms of employer/employee lending remain exempt.

Next steps

Based on stakeholder responses to its further questions regarding the STIFC market, the government will reach a decision as to whether to bring within scope STIFC provided directly by merchants where it is offered online or a distance.
The government expects to publish a second consultation paper asking for feedback on draft legislation by the end of 2022.
It aims to lay secondary legislation in mid-2023 confirming the scope and framework of the new regime. This will allow the FCA to consult on how it will regulate this sector.