Dear CEO letter: Buy Now Pay Later (BNPL) firms
Currently, lenders and merchants do not need to be authorised by the FCA to enter into BNPL agreements. However, financial promotions of those unregulated/exempt agreements must still comply with certain regulatory requirements.
In its letter, the FCA points out that, pursuant to sections 21 and 25 of the Financial Services and Markets Act 2000, no entity can communicate a financial promotion as a business activity unless: it is an authorised firm; the communication is approved by an authorised firm; or a relevant exemption applies. Failure to comply constitutes a criminal offence.
A financial promotion for BNPL includes any form of communication made across any media in the course of business, that invites a consumer to purchase a good or service by entering into a BNPL agreement. This includes, for example, posters in shop windows, paid for Google adverts, and posts made by influencers on social media.
The FCA makes specific reference in its letter to section 3 of the Consumer Credit sourcebook in the FCA Handbook (CONC 3), which requires that a financial promotion must be clear, fair, and not misleading.
When an FCA-authorised firm issues a promotion relating to a BNPL agreement, it must ensure the promotion complies with CONC 3. Unauthorised firms will need to ensure that any promotions relating to BNPL products are approved by an authorised firm, which itself will be subject to the CONC 3 requirements when approving the promotion.
The FCA has specific concerns that there is widespread non-compliance with CONC 3, particularly on websites and social media. Put simply, the FCA considers that firms are emphasising the benefits of BNPL products without balancing them against the relevant risks to customers (for example, the risks of taking on debt that customers cannot afford to repay and the consequences of missed payments).
The FCA’s letter concludes by setting out “next steps” and indicating that the FCA will be monitoring the market proactively going forward and will take further action where appropriate (which may include utilising its enforcement, criminal, civil and other regulatory powers).
As highlighted in the Dear CEO letter, compliance is likely to become all the more important given the new Consumer Duty. It seems inevitable that the FCA will become increasingly involved in the protection of consumers in this sector, particularly taking into account the current economic climate and the cost-of-living crisis.
Given the FCA’s warnings, firms need to focus on compliance: those that are FCA-authorised must ensure that their promotions comply with CONC 3; those that are not authorised must ensure promotions are approved by an authorised entity. Where issues are identified, firms must consider carefully whether they need to notify the FCA and what steps should be taken to address them.