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UK financial watchdog urges businesses to review ‘buy now, pay later’ promotions – Osborne Clarke

All ‘buy now, pay later’ products must comply with financial promotion rules or risk enforcement measures, FCA warns

The Financial Conduct Authority (FCA) has writing to companies warning them that while Buy Now, Pay Later (BNPL) agreements are not yet regulated, the financial promotions used to sell them must meet regulatory requirements.

As customers grapple with a cost of living crisis and the FCA implements its new consumer duty, businesses can expect the UK financial regulator to be extremely vigilant against misleading advertising and take coercive measures if necessary.

Who has been notified?

The FCA letter applies to all companies (whether FCA approved or not) engaged in the business of entering into BNPL agreements with consumers. It includes merchants (FCA-licensed or not) who introduce clients to businesses for the purpose of entering into a BNPL agreement to finance a purchase of goods or services from them. And this applies to authorized companies endorsing BNPL financial promotions, including promotions communicated by social media influencers

The letter stems from the FCA’s concern that financial promotions on websites and social media, including posts by social media influencers, may not be balanced, meaning they could encourage impulse buying (and irresponsible borrowing).

They are particularly concerned that advertisements promote the benefits of BNPL but do not weigh these benefits against risks such as debt that customers cannot afford to repay, the consequences of missed payments and the risks associated with the lack of information on when fees become payable.

It is important to note that this is a market where some companies are authorized by the FCA and some are not. In an effort to send a market-wide message and get the attention of unauthorized (exempt) firms, the FCA pointed to a hitherto largely unenforced legal framework (at least in the credit space) that dictates that unauthorized (exempt) lenders and merchants must have their financial promotions approved by an authorized company and failure to do so is a criminal offence.

Since many of the companies that the FCA wishes to contact are not authorized, it has separately sent a letter at the British Retail Consortium. Presumably, the UK financial regulator hopes that the use of this channel will more effectively convey its message to unauthorized lenders and traders offering BNPL deals. Specifically, the message is that they must ensure that every promotion is approved by an authorized company or risk committing a criminal offense.

What is the legal framework?

The letter states that section 21 of the Financial Services and Markets Act 2000 (FSMA) prohibits anyone from communicating a financial promotion as a commercial activity unless:

  • it is an authorized company;
  • the communication is approved by an authorized company; Where
  • a relevant exemption applies.

The definition of “financial promotion” is broad and includes exempt credit agreements. The letter also points out that Section 25 of the FSMA states that a violation of Section 21 is a criminal offence.

What are the requirements?

Currently, lenders and merchants do not need to be authorized by the FCA to enter into BNPL agreements; however, financial promotions of these exempt deals must still comply with certain high-level regulatory requirements depending on who is disclosing or endorsing the promotion.

  • Authorized lenders and merchants: When an authorized firm issues or approves a financial promotion of a BNPL arrangement, it must comply with a requirement (set out in section 3 of the source book on consumer credit in the FCA Handbook (CONC 3) according to which the financial promotion must be clear, fair and not misleading.
  • Unauthorized lenders promoting unregulated BNPL deals: The FCA states that an unauthorized lender promoting BNPL deals must obtain approval for the promotion from an authorized firm to avoid committing a criminal offense unless a relevant exemption applies. applies (i.e. the financial promotion itself is exempt, which is basically generally unlikely). Although the CONC 3 requirement to ensure that an advertisement is clear, fair and not misleading does not itself apply to unauthorized lenders, it will apply to the authorized business that endorses its financial promotions.
  • Unauthorized merchants promoting exempt BNPL arrangements to their customers as payment: Unauthorized merchants who do not receive a monetary reward for introducing clients to BNPL’s authorized lenders will not need to have their advertisements approved by anyone from a regulatory perspective, although their contracts with lenders may dictate otherwise. Unauthorized merchants promoting BNPL offered by unauthorized lenders may need to obtain approval for the communication from an authorized company to avoid the risk of committing a criminal offence.

The FCA said it would contact unauthorized lenders and traders separately to explain their regulatory obligations.

The regulator changes direction

Referring to criminal liability and enforcement action, the FCA letters were designed to “shake up” the BNPL sector.

Unlicensed businesses promoting BNPL products in the past may have considered – and not without reason – that it was disproportionate to take the extra step of having their promotions approved by an authorized business. . All unauthorized businesses offering exempt credit (including, for example, schools and dental practices, as well as unauthorized BNPL lenders) are already subject to the rules and guidelines issued by the Advertising Standards Authoritywho ensure that their promotions are not misleading, harmful or irresponsible, and Advertising Codes of Practice Committeewhich apply more broadly to both non-serving advertising and serving advertising.

After ensuring that they meet these parallel standards, a requirement to obtain further “approval” by an authorized company that the advertisement is clear, fair and not misleading would seem disproportionate and absurd – and companies will have considered not do so as “low risk” given the lack of enforcement action by the FCA.

Some might argue that the fact that the financial promotion restriction applies to such a wide range of FCA-exempt activities is more a matter of accident than design. However, it is clear that the FCA is so concerned about the consumer risks associated with BNPL’s rapid rise in popularity that it is prepared to use any means, fair or not, to get its message across to unauthorized companies. .

This letter should be viewed in the context of the rising cost of living and the expectation that an increasing number of consumers will find themselves in financial difficulty and in a vulnerable situation. This is therefore a warning to all companies, FCA authorized or not, involved in the production, approval or distribution of financial promotions for non-regulated BNPL products: they must ensure that these promotions are sufficiently balanced.

Changes in the pipeline

Earlier this summer, HM Treasury published its answer to his long-awaited consultation on the regulation of BNPL. One of the issues considered by the government was whether all promotions from the BNPL arrangements should fall under the financial promotions regime. The government’s response confirmed that this remains its view.

In practice, this means that once the new regulatory rules come into effect, BNPL lenders will have to provide standardized information such as representative APRs in their announcements when they are triggered. This also means that merchants offering BNPL will need to obtain approval for BNPL product promotions from an authorized person (who may but need not be their BNPL lending partner). The government will consult on its proposed rules on financial promotions for BNPL agreements.

In addition, the Financial Services and Markets Bill was tabled in Parliament on July 20, 2022. The bill amends, among other things, Article 21 of the FSMA to establish a new regulatory “gateway” through which authorized companies must pass before they can approve promotions from unauthorized companies. Any licensed firm wishing to endorse financial promotions from unauthorized firms will first need to obtain clearance from the FCA.

The UK financial regulator will also be able to place limits on the types of promotions companies can approve; for example, restricting companies from approving financial promotions in their area of ​​expertise. Before the bill can receive Royal Assent and become law, it will go through two more readings in the House of Commons, go through committee and report stages, and repeat the same process in the House of Commons. lords.

Commentary by Osborne Clarke

In light of these letters, we can expect the FCA to take a more proactive approach to monitoring and enforcing BNPL’s promotions, particularly in relation to unauthorized firms. Given that this is not an area the regulator has focused on in the past, the various references to criminal liability in the letters will be alarming to unauthorized BNPL lenders and traders – which we suppose to be exactly the intention of the regulator.

While BNPL will be a regulated activity in due course, this is currently not the case; and the exemption on which it relies is also relied upon by potentially thousands of other unauthorized companies. Non-financial services companies, in particular, would be excused for not knowing that the financial promotion restriction applies and that they are likely to commit a criminal offense within the meaning of the FSMA if their advertisements are not approved by a FCA approved company.

Given this, it is perhaps a bit dishonest of the UK regulator to suddenly start raising this point in the context of just one particular type of exempt credit. The ensuing risk of panic for thousands of unauthorized (exempt) businesses is real, but the FCA probably doesn’t care too much about it.

There are now many regulations – existing and in the pipeline – that companies need to tackle: the FCA’s guidance on vulnerable customers, the new consumer requirement and upcoming proposals to integrate the promotion of all BNPL products. in financial promotions. diet are all relevant. It is the responsibility of companies to ensure that their compliance, marketing and advertising teams keep abreast of developments and fully understand what is expected of them by the UK regulator.

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