Regulation of Buy-Now Pay-Later consultation closes

HM Treasury's consultation on the regulation of buy now pay later closed on 6 January 2022¹. The consultation, published on 21 October 2021, sought views on a range of policy options and regulatory controls for the sector¹.

Buy now pay later lets consumers pay for goods and services by instalment. An exemption in law means these payment plans are not treated in the same way as traditional credit agreements, so they are not regulated by the Financial Conduct Authority¹. The FCA's Woolard Review, which reported in February 2021, found that many consumers did not see buy now pay later as a form of credit, so did not consider arrangements as carefully as they might otherwise have done¹. The review said there was "an urgent need to regulate all" such products¹. The value of buy now pay later transactions nearly quadrupled between January and December 2020, to £2.7 billion¹.

The Government announced its intention to bring unregulated interest-free buy now pay later products into regulation on 2 February 2021². HM Treasury published its response to the consultation on 20 June 2022². In that response, the Government said the scope of regulation should capture buy now pay later as well as currently exempt agreements, referred to as short-term interest-free credit, when they are provided by third-party lenders². It said it was "minded to extend" this scope to short-term interest-free credit provided directly by merchants where it is offered online or at a distance². Exemptions would be allowed for specific agreements where there is limited risk of potential consumer detriment and where regulation would otherwise adversely affect day-to-day business activities².

The response also said section 75 should not be disapplied for agreements brought within the scope of regulation, and that current Consumer Credit Act requirements on post-contractual information, particularly the timing of when it must be sent, may need to be tailored for buy now pay later and short-term interest-free credit agreements given their sometimes very short-term nature². It said proportionate regulation should include the ability for consumers to access the Financial Ombudsman Service for issues concerning the conduct of lenders².

Why it matters for households

Buy now pay later agreements are currently outside FCA regulation because of a legal exemption¹, so consumers using them do not have the same protections as those using traditional credit agreements. The consultation that closed on 6 January 2022 was the first formal step towards changing that¹. The Government's stated scope would bring buy now pay later and third-party short-term interest-free credit into regulation, with a possible extension to merchant-provided short-term interest-free credit sold online or at a distance². The response also indicates that section 75 protection would not be removed for agreements brought into scope, and that consumers would be able to take conduct complaints about lenders to the Financial Ombudsman Service². No new rules took effect on 6 January 2022; the consultation closing date is a procedural step, and the timing of any change to consumer protections depends on the legislation that follows.

What happens next

HM Treasury requested further information on merchant-provided short-term interest-free credit by Monday 1 August 2022². The Government said it intended to publish and consult on draft legislation at the end of 2022, with the aim of laying secondary legislation in mid-2023². In parallel, the FCA is to consult on its approach to rules changes². The Government also announced on 16 June 2022 its intention to reform the Consumer Credit Act, with a consultation expected by the end of 2022².