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Although buy now, pay later (BNPL) products may escape regulation, the Financial Conduct Authority (FCA) has warned that all BNPL products in the UK must comply with financial promotion rules.
The FCA has told businesses offering BNPL products that, even if they are unregulated or exempt, they must ensure their financial promotions are clear, fair and not misleading.
Unauthorised firms might be committing a criminal offence if they do not have an FCA-authorised firm approve their financial promotions, the regulator said.
The FCA is concerned consumers could be misled by BNPL financial promotions and said it has seen financial adverts on websites and social media, including posts by social media influencers, which may breach FCA rules.
For example, some adverts emphasise the benefits of BNPL products without fair and prominent warnings of any risks to customers.
According to the agency, BNPL could enable consumers to take on debt that customers cannot afford to repay, or consumers may not be informed of the consequences of missed payments and about when charges become payable. Using BNPL may also have other adverse consequences such as the impact on the customer's credit file.
“As we face a cost-of-living crisis, consumers are having to make difficult decisions about their finances and how they pay for goods and services,” said Sheldon Mills, executive director of consumers and competition at the FCA.
“Firms need to ensure consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions,” he added.
“It is vital that adverts are clear, fair and not misleading.”
The FCA has continuously warned consumers that BNPL products, as interest- and fee-free credit agreements that are repayable in less than 12 months, fall outside its regulatory purview.
Despite being unregulated, the agency does have certain limited powers against unauthorised firms and FCA-authorised firms that offer unregulated or exempt BNPL products.
For instance, the regulator can use general consumer protection legislation if a consumer contract is likely to be unfair or insufficiently transparent, the FCA said in its perimeter report last month.
This authority was used earlier in February, when the FCA persuaded the UK’s largest BNPL providers Clearpay, Klarna, Laybuy and Openpay to change their contract terms to address concerns about potential risks of harm to consumers.
To address the regulatory gap, HM Treasury is now working to create secondary legislation that would give more power to the FCA to crack down on BNPL products that may harm consumers. Draft secondary regulations are expected to be released by the end of the year.
The FCA now says it will continue to engage with BNPL providers and monitor the market “to ensure expectations are met” and will use its criminal and regulatory enforcement powers when promotions do not comply.
The regulator noted that its monitoring exercise has already led to 4,226 promotions being changed or withdrawn.
