August 24, 2022 | Amanda Khatri
Estimated reading time: 7 minutes
No country for BNPL misleading adverts: FCA regulation on the horizon
We’ve had quite a few bumps in the road these past few years. From the Covid-19 pandemic, several lockdowns, the war against Ukraine, plus the environmental and economic repercussions of it all. Inflation is also forever on the climb, with interest rates predicted to rise to 18% next year on energy bills in the UK alone.
With rising living costs, naturally, the option to ‘Buy Now, Pay Later’ (BNPL) has rapidly grown in popularity since the pandemic. BNPL allows users to purchase a product and choose to either pay later or split the payment into instalments – interest-free and without any credit checks.
Well-known BNPL entities include Klarna, Clearpay – and more recently PayPal, Monzo, Barclays and Natwest – even Apple is looking to add BNPL to its growing list of services. According to the Q4 2021 BNPL Survey, BNPL payments in the United Kingdom are expected to grow by 50.5% on annual basis to reach over £2,500 million in 2022.
BNPL services are a great form of borrowing for those who can afford it, but for many, there can be a struggle to pay back the funds – a third of UK BNPL users can’t handle the repayments and have seen them become unmanageable. This stands to reason, consumers without funds at the time are able to draw down large sums, only to find they still don’t have the funds when it’s time to pay back the loan. A lack of credit checks and knowing your customer (KYC) checks at the time of purchase means that there’s very little in terms of affordability checks. Moreover, the consequences of missed payments – such as debt, bad credit, or even bailiffs, are often unclear.
This fast-growing industry is currently unregulated but, as of June 2022, the UK government has set out plans to regulate, which will come into force by 2023.
FCA hones in on the pitfalls of BNPL
In a recent press release, the Financial Conduct Authority (FCA) has warned BNPL product providers that – even though it is a largely unregulated industry – their financial promotions must obey financial promotion rules. If promotions aren’t approved by an FCA-authorised firm, they could be committing a criminal offence.
Financial promotions include any form of communication made across any media that invites a customer to purchase a good or service by entering a BNPL agreement. This consists of posters in shop windows, paid Google ads and posts by influencers on social media.
The FCA is concerned that consumers could be misled by BNPL companies after witnessing adverts on websites and social media posts by influencers that may breach FCA rules. In particular, the FCA has said that it expects promotions around these products to:
- Be clear, fair, and not misleading.
- Allude to the risks to customers, such as debts if customers cannot afford repayments.
- List consequences of missed payments such as credit score impacts.
- Add information about when charges become payable.
In a recent roundtable, BNPL providers discussed upcoming regulations and also requested support for borrowers in financial difficulty by including references to money guidance and debt advice. This year alone, the FCA has taken enforcement action against a number of firms that have breached rules, resulting in 4,226 promotions being altered or completely withdrawn.
The FCA has written to BNPL providers in a Dear CEO letter and the British Retail Consortium. If the FCA sees BNPL promotions that don’t comply, it will use criminal and regulatory enforcement powers to take action against said firms.
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FCA’s Dear CEO letter summary
If firms enter unregulated and exempt BNPL agreements, they must review financial promotions to ensure they meet regulatory requirements. This applies to:
- All Firms (whether FCA-authorised or not) carrying out the activity of entering into BNPL agreements with consumers:
- Merchants (whether FCA-authorised or not) that introduce customers to firms to enter into a BNPL agreement to fund a purchase of goods or services from them
- Authorised firms approving financial promotions of BNPL agreements, including social media influencers.
It is a criminal offence (Section 25, FSMA) for a person in the course of business to communicate a financial promotion unless
- That person is an authorised person
- The content of the communication is approved by an authorised person
- A relevant exemption applies. This offence carries a maximum sentence of two years imprisonment, a fine, or both.
The FCA are concerned that BNPL promotions may promote impulse buying. Firms that promote BNPL agreements must comply with the rules in CONC 3 unless they are exempt.
CONC 3 sets out what this entails, including that the financial promotion:
- must be balanced, and, in particular, does not emphasise any potential benefits of entering into an exempt BNPL agreement without also giving a fair and prominent indication of any relevant risks;
- must be sufficient for, and presented in a way that is likely to be understood by, the average member of the group to which it is directed, or by which it is expected to be received; and
- must not disguise, omit, diminish or obscure important information, statements or warnings.
If the FCA identify non-compliance, they can use a wide range of enforcement powers, such as withdrawing permissions and issuing fines. Under section 137S of FSMA 2000, the FCA can direct a firm to withdraw an advert (or its approval of an advert), or to prevent it from being used in the first place.
These rules were confirmed in relation to the new Consumer Duty. The firms must aim to avoid harm to retail customers.
This applies to all firms involved in the production, approval or distribution of retail customer communications, regardless of whether the firm has a direct relationship with a retail customer, and including where a firm produces, approves or distributes financial promotions or other advertisements.
Given recent warnings around vulnerable consumers, it is good to see the FCA moving forward in regulating the BNPL industry. BNPL offerings, and the providers behind them, have grown at an exceptionally fast pace. While innovation is welcome, unregulated innovation comes with risks. In the case of BNPL, it is resulting in a swathe of unprotected consumers who are in need of regulatory protection. With a lack of education around debt and missed payments, customers can be easily exploited and left in vulnerable financial situations – short-term financing isn’t always all that it’s cracked up to be.
BNPL services entice consumers with adverts that emphasise how you can try before you buy – igniting customers to purchase more goods than they need and use their homes as changing rooms – the environmental ramifications alone are great, but that’s another story.
Targeting the young and impressionable Gen Z, BNPL payments have been showcasing the benefits of interest-free purchases across social media and shop windows. BNPL does have its uses – and can open up finance to the masses – but there needs to be far clearer information about the dangers of using such products. Regulators need to ensure that users don’t become victims in an unregulated industry.
Transparency for financial services is now branching out and taking into account BNPL and cryptocurrency – two industries that were operating in between loopholes and avoiding repercussions. The FCA now expects BNPL services to take responsibility for what promotions they share and look after its customers – helping to equal the balance of profits for BNPL companies and consumer protection.
It’s clear that regulation for BNPL companies is on the horizon. Instead of being reactive to these changes, stay three steps ahead by implementing automated regulatory intelligence to highlight upcoming regulatory changes and emerging risks specific to your business.