FCA finalises UK buy-now, pay-later credit rules ahead of July implementation

The UK Financial Conduct Authority (FCA) has published its final rules for the regulation of buy-now, pay-later products that are now defined as deferred payment credit (DPC). The rules take effect on 15 July, when DPC lending becomes a regulated activity – this follows a lengthy government consultation process. 

Following the consultation process and feedback from industry, the FCA has confirmed that it will implement the rules and guidance consulted on with only minor changes to ensure these work as intended and expectations are clear. The FCA opened its consultation on draft rules for buy-now, pay-later products in July last year.

Information requirements

The FCA has removed the requirement for firms to provide certain items from the mandatory key product information (KPI) that lenders must give customers before entering into a DPC agreement, on the basis that  provision of this information is less central to customers' immediate decision-making.

This includes details on any withdrawal or cancellation rights, information on early repayment, the customer's right to refer a complaint to the Financial Ombudsman and an adequate explanation of what a continuous payment authority is. Instead, this information should be included in the "additional product information" which firms must either give or make available to customers before the agreement is made.

The FCA has also responded to feedback that lenders may not know with certainty at the point of providing KPI whether a credit reference agency (CRA) check will be needed; instead, it now requires  lenders to indicate whether they will (where this is known) or may obtain information from a CRA before deciding whether to proceed with the agreement. 

Missed repayments

The FCA has provided additional guidance on what firms should consider in particular when providing information to customers about a missed payment. This includes the circumstances in which it applies any charges for missed payments and when it reports missed payments to CRAs. It has also clarified that, when notifying customers about a missed payment, firms do not need to list all potential future adverse consequences as a result of the missed payment in every case. However, they must provide sufficient information on the adverse consequences that arise from or are likely to arise from the missed payment. This is to allow firms to use their judgment about what information is most pertinent to a customer based on their individual circumstances.

A new requirement has also been added that requires firms to signpost customers to free and impartial money guidance and debt advice and to communicate effectively the potential benefits of accessing this information when giving a customer notice of its intention to enforce or terminate an agreement.

Importantly, the FCA has resisted prescribing the medium through which firms should communicate its new rules for customers on missed payments set out in its Consumer Credit Sourcebook (CONC) Chapter 7or its approach to the timings of these communications. Instead, lenders will be required to send a communication to a customer as soon as possible after a missed payment has occurred, in a medium which is most likely to support their customers in making effective decisions based on how customers have engaged with previous communications.

Finally, lenders will no longer be required to notify a guarantor when a borrower has missed a payment under a DPC agreement.

Creditworthiness provisions

The FCA has confirmed it is proceeding with applying its existing creditworthiness provisions in CONC 5.2A to DPC lending, including to agreements of £50 or less, giving firms flexibility to tailor assessments while raising existing standards. It will use regulatory reporting to continue to monitor how the market is serving customers post-regulation.

The FCA has recognised that there are challenges in lending to customers with no or "thin" credit files, but in its view this challenge is not specific to DPC lending. The FCA is aware that some lenders are using Open Banking to bridge gaps between credit files and affordability assessments, and notes that these approaches can be compliant with CONC 5.2A based on individual circumstances.

Application of other FCA Handbook requirements

Key FCA Handbook requirements will be continued to be applied by the UK financial regulator beyond CONC (including its sourcebooks on principles for businesses; threshold conditions; general provisions; and senior management arrangements, systems and controls) to DPC lenders, as well as existing regulatory reporting requirements with transitional provisions for when firms will need to submit product sales data returns.

Noting that DPC lenders will also come within scope of the Senior Managers and Certification Regime (SMCR), the FCA has acknowledged that HM Treasury has commenced a consultation on SMCR reform, which may create uncertainty for DPC lenders that are seeking to become authorised. In response, the FCA has committed to help all DPC lenders that are planning on becoming authorised to understand what requirements they will be subject to and when. It has also said it may consider a "modification by consent" approach where appropriate, which could be used to temporarily waive certain FCA Handbook requirements.

Osborne Clarke comment

The final rules settle a flexible regulatory regime for DPC lenders aimed at enabling firms to compete on transparency, simplicity and customer journeys.

The FCA has listened to consultation feedback in key areas. It will be positive news to firms that the approach set out in the consultation is largely unchanged and, instead, the FCA has focused on areas where firms require more guidance or where it would be appropriate to apply a more proportionate approach.

Firms that have already been busy preparing for regulation since the consultation will now need to consider any additional changes necessary to their systems and controls to comply with the final rules ahead of 15 July.

If you would like to discuss the impact of DPC regulation on your business, or need support with preparation for compliance, please contact our team of experts below.

Fabian Trotman-Drake, a Trainee Solicitor with Osborne Clarke, contributed to this Insight.