FCA Warning of ‘Misleading’ Ads Stirs Debate About UK BNPL Regulation, Consumer Protections

The buy now, pay later (BNPL) industry has once again drawn the ire of U.K. regulators.

In a press release dated Aug. 19, the U.K.’s Financial Conduct Authority (FCA) issued a warning to BNPL firms, cautioning them against misleading advertisements and the lack of compliance with the FCA’s financial promotion rules.

“While some agreements are unregulated,” an FCA-authorized firm is required to approve all BNPL ads unless an exemption applies, the report stated, adding that failure to do so puts the firm at risk of committing a criminal offense. As a matter of fact, the regulator has taken action against firms that have breached its rules, leading to a change or withdrawal of over 4,200 BNPL-related promotions so far this year.

According to Sheldon Mills, executive director of consumers and competition at the FCA, these measures come at a critical time as the U.K. faces an unprecedented cost of living crisis and consumers are having to make tough decisions about their finances.

In fact, recent data from the country’s Office for National Statistics, per a PYMNTS report, show that the Consumer Price Index (CPI), a well-known indicator of inflation, has jumped by 10.1% in the year to July, signaling a double-digit inflation rate for the first time since 1982.

Related: UK’s 10% Inflation Rates Stretch Consumers’ Paychecks and Patience

The Bank of England, which is working to bring inflation back down to its 2% target, has also predicted that the country will enter a recession in the fourth quarter of 2022 as the unemployment rate continues to rise into 2023.

Against this bleak backdrop, Mills said proactively protecting consumers should be the top priority for BNPL lenders, adding, “Firms need to ensure consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions. It is vital that adverts are clear, fair, and not misleading.”

The FCA added that the warning was due to online financial adverts and posts by social media influencers which touted the benefits of BNPL without any warnings of risks, such as the penalties for missed payments, the impact on a borrower’s credit file or the risk of taking on more debt than they can afford.

UK Edges Closer to BNPL Regulation

Lawmakers, civil society and consumer watchdog groups have made urgent calls for the regulation of the BNPL sector in recent years as the use of the product exploded during the pandemic. In 2021 alone, researchers estimated that the U.K. BNPL market was worth £5.7 billion ($6.7 billion).

See also: UK Lawmaker Calls for Urgent Regulation of Buy Now Pay Later Providers

The publication of an independent review in February 2021 also warned that the sector represented a “significant potential consumer harm,” prompting the U.K. Treasury to open a public consultation to set out plans for regulation ahead of a separate consultation by the FCA to develop the rules.

More on this: UK BNPL Regulation Unlikely Before Mid-2023

Following the closing of the consultations, the government shed more light on the looming regulation in June, announcing that the rules will require BNPL providers to be approved by the FCA and make it mandatory for firms to carry out checks on consumers to ensure that they can afford loans.

To plug any regulatory holes, the regulation will not only affect local BNPL services which benefit from a legal exemption in the law for short-term credit-free credits, but will also extend to other forms of unsecured short-term credit.

Read more: BNPL Regs Likely Coming Late 2022 for EU, UK But U.S. Lags Behind

For now, the government will be publishing a consultation on the draft legislation towards the end of this year, with secondary legislation expected by the middle of 2023. The FCA is also expected to publish a consultation on industry rules after the government publishes its secondary legislation.

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