Proportionality is central to the Treasury's much awaited consultation on the regulation of unregulated Buy Now Pay Later (BNPL) products. The Treasury's aim in its approach to BNPL regulation is to strike the balance to ensure consumers are appropriately protected without limiting the availability of useful financial products, and stifling innovation.

Just what the detail of the BNPL regulatory regime might look like is a matter for the FCA, which will consult on and develop the applicable FCA rules in due course, but first the Treasury is consulting in order to inform policy decisions around the form of BNPL regulation.

BNPL products typically split the purchase price of generally low value (average £65-£75) and often fashion items into several amounts taken at regular - usually monthly, weekly or fortnightly – intervals but can also take the form of a single deferred payment, allowing the customer to 'try before they buy'. No interest is charged on these purchases.

As we explained here, BNPL products currently fall within an exemption from the consumer credit regime which allows for the delayed payment of goods provided the delay is time limited (maximum 12 months, and no more than 12 payments) and no interest is charged. We discussed here the Woolard review's recommendation that BNPL products be regulated as a matter of urgency given the potential risk of consumer harm due to various factors including a lack of understanding of BNPL products, the absence of affordability checks and the ability to accrue larger debts through multiple purchases across different BNPL lenders.

BNPL product providers will not be the only ones following the consultation with keen interest; so too will retailers as regulation will impact merchants as well as their BNPL provider partners. Retailers following developments in the BNPL space should note in particular three key issues covered by the Treasury's consultation:

Credit broking

The government does not propose to require merchants which offer BNPL as a payment option to be subject to FCA regulation. BNPL has fast rooted itself in the customer journey for online purchases and consumers value the convenience of these payment options. The government is keen to ensure that any regulatory intervention does not stop merchants from offering BNPL payment options.

Under the current regulatory framework if a business introduces a customer to a lender with a view to the customer entering into a regulated credit agreement, the business will be undertaking 'credit broking', which is a regulated activity requiring the business to be authorised and regulated by the FCA and subject to the relevant FCA rules and provisions of the Consumer Credit Act 1974.

If BNPL products were to become regulated, under the current framework retailers which offer BNPL as a payment option would be credit broking and so would need to apply to the FCA for authorisation and comply with the relevant regulations. The Treasury is mindful that the costly compliance burden might cause retailers, particularly smaller businesses, to withdraw these payment options and thereby limit consumer choice. The consultation also acknowledges that larger merchants, many of which are already FCA authorised for credit broking or which have the resources to absorb the compliance costs, might gain an unfair competitive advantage as a result.

The general proposal, therefore, is that should BNPL be regulated an exemption would apply such that a retailer broking BNPL products would not be subject to regulation as a credit broker. A carve out for merchants which sell goods or services while making home visits is likely given the risks of pressure selling in that context.

Advertising and promotions

The government appears keen to bring all promotions of BNPL agreements within the financial promotions regime. This would involve an amendment to or the removal of the existing exemption for BNPL financial promotions where the lender is FCA-authorised.

This would mean that retailers which are not FCA-authorised and which make communications which are 'invitations or inducements' to enter credit agreements would have to get each communication approved by an FCA-authorised person. Where the retailer's BNPL provider partner is FCA-authorised, the BNPL provider could approve the communications, but otherwise the sign off of a third party FCA-authorised person would be required.

The communications would also have to comply with the FCA's financial promotions rules, although it isn't clear whether these would be adapted for BNPL.

Short-term interest free credit 

The consultation distinguishes BNPL products from short-term interest free credit. Short-term interest free credit benefits from the same exemption from the consumer credit regime as BNPL products, and includes free instalment loans repayable within 12 months generally offered by third party lenders to finance the purchase of higher value goods such as white goods, electronics and furniture, as well as arrangements to finance sports club memberships, all of which are typically provided in-store rather than online.

The government is not minded to bring short-term interest free credit within the regulation. This form of credit has been around for decades without consumer harm concerns being raised, so while it shares some of the same potential risks for consumer detriment as BNPL and even involves additional risks given the higher value of the financing and the fact that agreements are made in-person and so are susceptible to possible pressure selling, it seems likely that it will remain outside the regulatory perimeter.

Next steps

It is clear from the consultation that the government is seeking a better understanding of the actual consumer harm being seen in the BNPL market in order to inform its policy in this space. A tricky task of creating a bespoke BNPL regulatory regime lies ahead but in the meantime responses must be submitted by 6 January 2022.

While the consultation does not bring much certainty on a number of issues it covers, BNPL providers and retailers should keep a keen eye on developments and be prepared for changes to current business practices.

If you would like to discuss the Treasury consultation further please contact Bruce Stephen or Lindsay Lee.


Lindsay Lee

Senior Associate