Act now or pay later

This week Treasury published its plans to legislate Buy Now Pay Later (BNPL) credit. The package of reforms has been much anticipated and will undoubtedly bring about significant change. Any Firm that wants to continue offering the product will have to be authorised by FCA. This will be achieved through a Temporary Permissions Regime (TPR) meaning all firms offering BNPL will be held to account by FCA from Regulation Day not the date of authorisation; so sooner than you think.

What will FCA expect?

FCA plan to publish a consultation on its proposed conduct rules for this product, as well as rules for firms operating on a TPR. In our view FCA are likely to propose that Firms apply the rules of the Consumer Credit Sourcebook (CONC). The creditworthiness rules in this sourcebook can be notoriously difficult to apply because the burden of responsibility is placed on Firms to determine what a reasonable affordability assessment looks like for their business model. Add the responsibilities of Consumer Duty into the mix and you have the perfect recipe for expensive redress schemes later down the line, unless FCA make their expectations super clear from the beginning. Firms will and must push for guidance starting now.

The cost of not acting now

You need only look what has happened across the high-cost short term credit market to understand the cost of getting it wrong. The recent Amigo final notice makes clear the FCA will go back to the start of lending in protecting customer interests. Yesterday’s lending will be held to account against today’s standards, which is why Firms need to start planning and making changes now. This will be critical to demonstrating the sustainability of your business models moving forward.

What you should be doing now

The FCA have already been bold in their messaging to the BNPL sector and we expect this to ramp up in readiness for Regulation day. Below we set out three areas outside of existing rules that Firms should be working on now:

Target Market Analysis:  BNPL as a product can serve a broad target market but has been favored by a younger demographic to date. This landscape is changing, and people of all ages are turning to the sector. More recently, those struggling with the cost-of-living crisis and those with lower financial resilience who have seen a reduction in their access to credit are turning to BNPL to manage their finances. Your customer demographic will drive how conduct rules should be applied and therefore it is important you spend the time now mapping and understanding it. 

Affordability assessments: What good looks like will be influenced by your target market and business model. The size, term and interest applied to this type of product does not carry significant risk of harm but the vulnerabilities of its users can.  FCA are likely to expect affordability assessments to be tailored, meaning that additional sustainability checks are applied for repeat customers or those with financial vulnerabilities. Complex affordability controls and a move away from the ‘fast finance’ access will impact Firm resources, costs and sustainability so should be thought about now.

Financial Promotions: FCA wrote to Firms only last June setting out expectations of financial promotions. Firms should be considering their resource requirements for approvals, it takes time to recruit, train and evidence competence for financial promotion sign off teams, and despite merchants not being required to be regulated their financial promotions will be and providers are going to be kept busy making sure all promotions meet the required standards.