Valentine’s Day 2023 saw not only flowers and chocolates, but the much-anticipated publication by the British government of draft legislation setting out how it intends to regulate the buy now, pay later (“BNPL”) sector. That BNPL agreements would eventually become subject to regulation by the UK's financial regulator (the Financial Conduct Authority ("FCA")) has been largely an inevitability since the Woolard Review in February 2021 recommended that “certain new credit products that are currently unregulated need to be brought within the regulatory framework as a matter of urgency.” Looking back at his words, Christopher Woolard might have a wry smile at the reference to "urgency"; two years later, BNPL agreements still remain unregulated. However, with the publication of this draft legislation a pathway through to regulation has finally become apparent.

BNPL, in the UK, refers to the provision of credit to consumers in reliance on a legislative exemption from FCA-authorisation contained in Article 60F(2) of the Financial Services and Markets Act (Regulated Activities) Order 2001. As things stand, a lender making a loan to a consumer will be outside the scope of regulation (and will not have to comply with the requirements of the Consumer Credit Act 1974 ("CCA")) if:

  1. there is no interest charged on the loan; 
  2. the loan will be repaid in no more than twelve instalments; and
  3. the repayments need to be made within twelve months of the loan being taken out.

The government's legislative proposal picks up where the Woolard Review left off, in revising Article 60F(2) to prevent essentially all BNPL firms from relying upon it, and consequently driving them into the FCA's embrace. While BNPL third-party providers (i.e. lenders whose business is entirely financial in scope) will now find themselves carrying on regulated activities, "merchants" (i.e. goods and service providers who extend credit using the Article 60F(2) exemption to consumers to enable those consumers to buy their products) will not. Given the reliance of such disparate groups as independent schools and domestic heating oil suppliers upon instalment payments, the government has been keen to make a distinction between them and BNPL lenders.

But whilst the proposal - issued alongside a consultation to stakeholders - gives a clear indication of the scope of future regulation, it's largely silent as to what that regulation will eventually look like. There are no detailed rules, with these set to arrive when the FCA sets out its proposed rules on BNPL (hopefully later this year). What we do now know, however, is that the government intends to disapply the pre-contractual requirements in the CCA which would otherwise kick in. This will come as a relief to BNPL firms which otherwise would have had to comply with onerous requirements regarding the provision of information. If, however, the government’s proposals proceed as intended, other provisions of the CCA such as creditworthiness assessments and prescribed requirements for agreements will soon be relevant to BNPL agreements.

Whilst unregulated BNPL firms will be eagerly looking out for the FCA's draft rules, they might also want to consider what the on-ramp to regulated status will look like. Much as they did with European firms during Brexit, the government intends to set up a "temporary permissions regime" in which BNPL firms will be deemed authorised and subject to FCA rules. Once in the regime, BNPL firms will then have a "landing slot" assigned where they will be expected to apply for authorisation as an FCA-regulated firm.

All in all, this Valentine's Day proposal is certainly not a sweet nothing - it should give BNPL firms and wider market participants some much-needed clarity on who will be subject to the rules, and the policy objectives the UK government is looking to meet by bringing BNPL into the regulatory framework. However with the FCA's rules yet to be published (they will follow the responses to the government's consultation), there's a while yet before the regulatory future of BNPL in the UK becomes clear.