The Buy Now, Pay Later (BNPL) sector is set for significant changes as the government moves forward with plans to regulate this rapidly growing industry. Following years of uncertainty, the Treasury has announced that new legislation is expected to come into force in 2026, bringing the Buy Now, Pay Later industry under the supervision of the Financial Conduct Authority (FCA).

The background…

The journey towards BNPL regulation has been a long one, driven by growing concerns about consumer protection in this largely unregulated sector. Key milestones include:

1. The Woolard Review (2021): This independent review highlighted the potential for consumer harm from unregulated BNPL services and urged swift action.

2. Initial Consultation (October 2021): The government sought views on how to achieve proportionate regulation of BNPL

3. Government Response (June 2022): Confirming plans to regulate both BNPL and Short-Term Interest-Free Credit (STIFC).

4. Draft Legislation Consultation (February 2023): The government published initial draft legislation for consultation.

5. Latest Consultation (October 2024): The Treasury issued an updated consultation paper and draft statutory instrument, reflecting feedback from previous consultations.

This latest consultation represents a significant step towards implementing a regulatory framework for BNPL, balancing consumer protection with the need to maintain access to useful financial products.

What’s changing?

The proposed regulations aim to provide consumers with key protections similar to those offered by other forms of credit. Here are some of the main changes:

1. Affordability checks: BNPL providers will need to ensure that customers can afford repayments before offering credit.

2. Clear information: Companies will be required to provide accessible and clear information about loan agreements upfront.

3. Stronger consumer rights: Users will have enhanced rights for product issues, including easier access to refunds and the ability to make complaints to the Financial Ombudsman Service.

4. FCA authorisation: Third-party BNPL providers will need to be directly authorised by the FCA.

Timeline for implementation

The changes are going to take effect quickly to ensure consumer protection in the Buy Now, Pay Later arena:

– Consultation period ends: 29 November 2024

– Expected legislation in Parliament: Early 2025

– FCA to finalise rules: 2025

– Regulations to take effect: 2026

How can businesses prepare?

For businesses offering or considering offering BNPL services, preparation will be key to ensuring compliance with the new regulations:

1. Review current practices: Assess your current BNPL offerings against the proposed regulations to identify areas that may need adjustment.

2. Enhance disclosure and transparency: Start developing clear, accessible information about BNPL agreements for customers.

3. Implement affordability checks: Begin designing processes for assessing customers’ ability to repay before offering BNPL credit.

4. Prepare for FCA authorisation: If you’re a third-party BNPL provider, start gathering the necessary documentation and information for FCA authorisation.

5. Train staff: Ensure your team is aware of the upcoming changes and their implications for your business operations .

6. Monitor regulatory developments: Stay informed about the FCA’s forthcoming rules and any updates to the proposed legislation.

7. Consider technology solutions: Explore digital tools that can help you meet new regulatory requirements, such as session monitoring and record-keeping capabilities.

8. Plan for the Temporary Permissions Regime (TPR): If you’re currently operating under the exemption, prepare to register for the TPR to continue business while seeking full FCA authorisation.

The bigger picture

The move to regulate the Buy Now, Pay Later industry comes amid growing concerns about the potential risks these products pose, particularly to vulnerable consumers. Research has shown that BNPL users are more likely to be in financial difficulty.

However, the government aims to strike a balance between consumer protection and supporting innovation in the financial sector. Economic Secretary to the Treasury, Tulip Siddiq, stated, ‘Our approach will give shoppers access to the key protections provided by other forms of credit while providing the sector with the certainty it needs to innovate and grow’.

As always, we’ll keep you updated on any developments that may affect your business. If you have any questions about how these changes might impact your operations, please get in touch.