Wed 24 Nov 2021

Buy-Now Pay-Later regulation - where to draw the line?

Following the FCA's Woolard Review on the unsecured credit market, the Government has published the consultation paper 'Regulation of Buy-Now Pay-Later' and is seeking the views of stakeholders on a proportionate approach for the regulation of buy-now pay-later products (BNPL).  The FCA is expected to follow up with a second consultation on conduct of business rules early in 2022, though confusingly they are referring to BNPL as 'deferred payment credit'.  

As my colleague Catherine MacPherson previously highlighted in her article the BNPL market has grown rapidly.  The recent boom in online retail shopping, particularly during the Covid-19 lockdown restrictions, has fuelled a significant growth in this type of unsecured credit - more than tripling in 2020.  It is estimated that around 7.7 million consumers in the UK currently carry a total of four billion pounds of debt through BNPL products.[1]  They are popular because they appear low risk compared to interest-bearing products, and look easy to re-pay in manageable instalments.  But as the Woolard Review points out, there can be considerable consumer detriment associated with their use.  It can be difficult to keep track of repayments due on multiple different platforms and consumers can quickly accumulate significant debts.  In light of these concerns, it is now widely acknowledged that BNPL products should be regulated.  The scope and level of regulation, however, is up for discussion.

The Consultation Paper

BNPL currently falls outside the FCA's regulatory perimeter under the article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which sets out an exclusion for certain interest free credit products.  The Consultation outlines the current three main uses of the exemption:

  • BNPL - products such as Klarna, Clearpay and Laybuy
  • Short-term interest free credit - used to purchase higher-value goods such as furniture, or to pay for season tickets and club memberships
  • Invoicing - arrangements between a supplier and customer which allows for payment at a later date

The Government has made it clear that invoicing should not be impacted by any proposed changes due to the central role it plays in ordinary business transactions.  The Consultation therefore focuses on the potential regulation of short-term interest free credit and BNPL.

Short-term interest free credit

The Consultation highlights that short-term interest free credit and BNPL share many qualities.  However, a key difference noted is the relationship between the consumer and the lender.  On the one hand, in BNPL transactions, a consumer is able create an account with a credit provider and use it for multiple purchases with different merchants.  On the other hand, short-term interest free credit agreements traditionally involve a third-party lender with no ongoing relationship with the consumer - these lenders typically have bespoke, long-term business relationships with relatively few merchants, and are often already FCA authorised.  BNPL arrangements have short repayment terms of around six weeks to three months, whereas short-term interest free credit can be up to 12 months.  On top of this, short-term interest free credit has existed for a number of years, with very little concerns raised about consumer harm.  Yet these differences in business models are not always clear cut.  The Consultation asks whether the two models should be subject to the same regulatory treatment, and indicates a preference to leave short-term interest free credit unregulated.

BNPL regulation

It is recognised that some regulatory credit controls may be disproportionate if applied to BNPL, so the Consultation seeks to find a balanced approach.  The Consultation considers the following changes:

  • the introduction of creditworthiness assessments
  • regulation of BNPL advertisement and promotions
  • the provision of pre-contractual information for consumers
  • regulation of the treatment of consumers in arrears
  • potential joint and several liability of the creditor with a supplier
  • a potential credit broking exemption for merchants using BNPL products as a payment option

Finally, the Consultation acknowledges that regulation could significantly alter the future use of BNPL products for consumers, for merchants that offer it as a payment option and for firms that provide the product.  A balance must be struck between the potential risks of BNPL products alongside their benefits.  The Consultation is a step in the right direction, but it remains to be seen where the Government will draw its regulatory line.

The deadline for responses to the Consultation is 6 January 2022 and should be sent to  We encourage anyone who may be impacted by this change to share their views.

[1] UK shoppers rack up £4.1bn debt in ‘buy now, pay later’ deals | Borrowing & debt | The Guardian

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