As consumers battle with the rising cost of living, many face difficult decisions about how they will finance their spending.

The increasingly popular Buy-Now-Pay-Later (BNPL) option can be an attractive payment method for purchasing goods and services, providing consumers with fixed sum credit without interest or other charges, to be repaid in 12 months or less.

However, in an open letter sent by the Financial Conduct Authority (FCA) and received by the British Retail Consortium last month, the FCA expressed its concerns on the financial promotion of these unregulated credit agreements, both in-store and online. The FCA has made clear that financial promotions must comply with certain regulatory requirements, as set out in the FCA Handbook.

What is a financial promotion?

Section 21 of the Financial Services and Markets Act 2000 (FSMA) defines a financial promotion as an invitation or inducement to enter into a credit agreement. Financial promotions can take the form of any communication made which induces or invites a consumer to enter into a BNPL agreement to purchase goods or services. This may include:

  • Advertisements in shop windows;
  • Advertisements on web browsers and websites; or
  • Social media posts, including posts made by influencers.

Chapter 3 of the Consumer Credit sourcebook in the FCA Handbook (CONC) contains the requirements that apply to financial promotions of credit agreements. The requirements apply to all firms entering into BNPL agreements with consumers and all merchants (which in this context will mean your retail or consumer business) that introduce consumers to these firms for the purposes of funding a purchase, irrespective of whether they are FCA authorised or not. They also apply to FCA-authorised firms that approve financial promotions of BNPL agreements.

What are the FCA's concerns?

In its letter, the FCA outlined concerns that some merchants offering BNPL products may be in breach of the requirements in CONC 3. For example:

  • The financial promotions of BNPL products may emphasise the benefits without clearly and fairly highlighting the risks to consumers. Consumers may therefore be unaware of the potential consequences of taking on too much debt, missing repayments or facing charges later on.
  • Some merchants may be using BNPL promotions to take advantage of consumer decision making and encourage impulse buying.

The FCA seeks to ensure that consumers are making properly informed financial decisions and places responsibility on firms and merchants to be transparent and fair in their communications.

What happens if you break the rules?

Under section 25 FSMA, it is a criminal offence to communicate a financial promotion unless:

  • You are an authorised person;
  • The content of the communication is approved by an authorised person; or
  • A relevant exemption applies.

Those who fail to comply with the regulations could face up to two years' imprisonment, a fine, or both.

The FCA can also use various criminal, civil and regulatory enforcement powers ranging from withdrawing adverts to issuing fines.

How do you ensure your promotions are compliant?

Given the serious consequences for non-compliance and with the FCA's plans to "proactively monitor the market to assess compliance", you should undertake an exercise to review your financial promotions now.

  • Firstly, unauthorised merchants (which a large number of retailers/consumer businesses will be) that promote BNPL agreements to customers as a method of payment should consider whether its promotion might not constitute a financial promotion and therefore falls outside scope of these requirements; the FCA does note that some merchants might not be in breach for simply communicating to consumers that an authorised firm offers BNPL agreements.
  • Where you are undertaking a financial promotion, it should be clear, fair and not misleading. In practice, this means that the promotion:
    • must be clearly identifiable as a promotion;
    • must be accurate;
    • must give a balanced view, and not emphasise any potential benefit of entering into a BNPL agreement without also providing a fair and prominent indication of the risks;
    • must be sufficient for, and presented in a way that is likely to be understood by, the average member of the group to which it is directed or will likely be received; and
    • must not disguise, omit, distinguish or obscure important information relating to the product.
  • If you are an unauthorised merchant promoting BNPL agreements as a method of payment for your goods you will either need:
    • approval of the financial promotion by an FCA authorised firm – you can check the register here; or
    • to rely on an exemption - for example, merchants who communicate a financial promotion that is made to introduce a customer to an authorised lender offering BNPL agreements to cover the purchase cost may be exempt under Article 15(2) of the FSMA (Financial Promotions) Order 2005).

Is there anything else you should look out for?

The FCA will continue to monitor firms and merchants for compliance with the regulations and, where necessary, will take appropriate further action. Unauthorised lenders and merchants can expect further communications from the FCA to clarify their regulatory obligations in relation to BNPL in the coming months.

Businesses should also stay alert for FCA communications regarding the new Consumer Duty which will be implemented from 31 July 2023 on a phased basis. The final rules and guidance on the duty, released earlier this year, require FCA-authorised firms to deliver good outcomes for retail customers, which covers the financial promotion of their products.