New research from the Financial Conduct Authority ("FCA") shows that the popularity of unregulated "buy-now-pay-later" ("BNPL") payment arrangements continues to increase as consumers are looking to spread the cost of their purchases across more manageable instalments in the current cost of living crisis. While BNPL products do not fall within the FCA's regulatory remit, in an effort to protect consumers where it can, the FCA has, once again, used its powers under the Consumer Rights Act 2015 ("CRA") to secure changes to potentially unfair and unclear contract terms used by two BNPL providers.
BNPL products: the regulatory position
Currently, BNPL agreements are not regulated as they fall within a legislative exemption contained in Article 60F(2) of the Financial Services and Markets Act (Regulated Activities) Order 2001. A lender making a BNPL loan to a consumer is out with the scope of the FCA's regulatory remit and does not have to comply with the requirements of the Consumer Credit Act 1974 ("CCA") if:
- there is no interest charged on the loan;
- the loan will be repaid in no more than twelve instalments; and
- the repayments will be made within twelve months of the loan being taken out.
However, all BNPL providers must comply with consumer protection legislation, including the CRA, which the FCA has powers to enforce.
As discussed in our previous blog on the matter, regulation for short term interest free credit is on the horizon. The UK government has proposed to revise Article 60F(2) so that BNPL providers have to be FCA-authorised and BNPL agreements will need to comply with CCA requirements. BNPL pre-contract information will be determined by FCA rules (yet to be drafted).
Increasing popularity of BNPL products
While new legislation is awaited, the demand for BNPL products continues to boom. The Woolard Review noted that the BNPL market more than trebled in 2020. Data published as part of the FCA's Financial Lives research, showed that 27% of UK adults (approximately 14 million) have used BNPL at least once in the six months prior to January 2023. This is up from 17% who said they had used it in the preceding 12 months in May 2022. The research also found that frequent users of BNPL may be more likely to be in financial difficulty.
FCA's action to protect consumers of BNPL products
While the FCA does not have regulatory oversight of BNPL products, it has stated that it is determined to protect consumers using financial services where it can. In line with this aim, the FCA has used its powers under the CRA to secure changes to potentially unfair and unclear contract terms used by BNPL providers.
Last year the FCA worked with certain BNPL providers to make some of their contractual terms with consumers fairer and easier to understand. The FCA published guidance for these BNPL providers which identified key contractual terms of concern, including continuous payment authority terms and terms around what happens if a consumer cancels the contract for purchases funded by a BNPL loan.
The FCA has recently once again used its powers under the CRA to secure changes to the contractual terms of two further BNPL providers. The contractual terms of concern were those which the FCA had previously highlighted in its guidance, namely payment authority terms and what happens when a consumer cancels a purchase funded by a BNPL loan.
In line with its strategy to act as an assertive regulator, the FCA has been proactive at the boundaries of the regulatory perimeter to ensure good outcomes for consumers while we await new legislation to bring BNPL agreements within the FCA's regulatory framework. With legislative change on the horizon, BNPL providers should continue to ensure that their contract terms comply with consumer protection legislation while also considering the effect of the proposed legislative amendments on their products and processes, including planning for FCA authorisation and regulation.