The FCA has published its review on the unsecured debt market; the headline being its intention to regulate Buy Now Pay Later products.  BNPL products have been the subject of much scrutiny over the last few months from MPs, social media campaigns and the Advertising Standards Authority.  

BNPL products are currently exempt from regulation making use of the instalment credit exemption (in summary where a customer makes 12 or fewer repayments in fewer than 12 months on an interest free basis).  In the FCA's words the instalment credit exemption was intended to be used for short term invoice deferral products and not BNPL.  The FCA has identified that BNPL products pose several potential harms, including:

  • understanding of BNPL which is often considered to be a payment solution rather than credit;
  • customers falsely perceive that they will have regulatory protection given BNPL is a financial service;
  • it is more difficult to protect vulnerable customers due to the ease and speed of the customer journey;
  • lack of affordability checks;
  • potential to create high levels of indebtedness;
  • late payment fees;
  • impact on wider market of lack of credit reporting; and
  • offering of BNPL on instore sales.  

As a result, it is recommended that the FCA and the Treasury work together to bring BNPL within the FCA's regulation.  Whilst this is stated to be an urgent requirement there is no immediate timeframe stated in the FCA's review and based on previous experience, it is to be presumed that there will be some form of transition period. 

Implications for retailers 

The headlines have very much focused on the impact of these changes on the leading BNPL providers.  However, regulation of BNPL will mean that retailers offering these products will also need to be regulated by the FCA (or appointed as an appointed representative) for credit broking.  Many retailers have been attracted to BNPL products because it offers a payment solution for their customers without the retailer being regulated by the FCA.  

It is important that these retailers now consider exactly what this means for them and their business model.  Many may choose to no longer offer BNPL products resulting in reduced access to credit for customers.  Indeed the FCA comments that this may be a positive measure improving consumer protection.  

Other implications

It remains to be seen how the Treasury will achieve the regulation of BNPL whilst leaving other instalment credit products outside of the regulated sector.  The FCA is clear that these changes will only apply to BNPL and other instalment credit products (eg payment plans paying for dental fees or membership fees) will remain outside the regulatory perimeters.  All businesses relying on the instalment credit exemption should ensure their products remain outside the regulatory perimeter once the amended legislation is published.