HM Treasury has launched a consultation on the regulation of Buy-Now, Pay-Later (“BNPL”) products.

As the consultation explains, the use of BNPL products has increased dramatically in recent years (some 14 million consumers were reported as having used them over a 6 month period last year). Despite their growing popularity, the Treasury is concerned about the risks they pose, particularly as a review in 2021 identified that BNPL products were often misunderstood by consumers and that almost half of the most frequent users of them were ‘over-indebted’.

In response, the Government has committed itself to bring BNPL products within the Financial Conduct Authority’s regulatory remit. Currently, so-called ‘deferred payment credit’ (“DPC”) contracts (which include BNPL products) enjoy an exemption from consumer credit regulation under the Financial Services and Markets Act 2000. As a result, BNPL and other DPC agreements do not have to comply with the provisions of the Consumer Credit Act 1974 (“CCA”), nor do firms offering such agreements need to be authorised and regulated by the FCA or comply with the FCA rules that apply to other consumer credit products.

As the consultation explains, the government is “keen to act with urgency to deliver regulation” which would “bring into regulation DPC agreements where they are offered by a third-party lender. This will require firms to be FCA authorised in order to offer BNPL products and will allow the FCA to supervise and set rules for firms. Firms will also be subject to certain provisions of the CCA”.

The consultation document sets out the Government’s approach to regulating BNPL products and identifies the following five principles that will inform its approach to new regulation and legislation:

1. Consumers must have access to simple, clear, understandable and accessible information;
2. Consumers should have protection when things go wrong;
3. Consumers should only be lent to if it is affordable;
4. Regulation should be proportionate to ensure continued access and choice; and,
5. Regulation must be introduced urgently to ensure consumers are protected and the sector has certainty.

The consultation also briefly touches on wider reform to the Consumer Credit Act 1974, stating that the government “recognises that some of the features of the CCA which are not suitable for BNPL may also not be achieving the best possible outcomes for other credit products”, and noting that respondents to a recent consultation felt that the CCA “has failed to keep up with developments of new products and the changing ways in which people engage with credit”. As a result, the government intends to set out detailed reform proposals of the CCA in a separate consultation “in due course”.

The consultation is open until 29 November 2024, and can be found here. The proposed draft legislation can be read here.