Buy-Now-Pay-Later … and get regulated? – all change for short-term lending

This article is provided by BRC Associate Member, Womble Bond Dickinson.

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Businesses that give their customers time to pay face a significant change in regulation. A mere five years since the former Government announced plans to bring certain Buy-Now-Pay-Later (BNPL) arrangements within the scope of financial regulation, the legislation to achieve this is finally before Parliament. And, while the change won't happen until summer 2026, now is the time for providers to check the effect the new rules will have on their arrangements – and whether they need to seek authorisation from the Financial Conduct Authority (FCA).

What's changing? Narrowing the current exemption

Many consumers rely on the ability to pay in instalments when they've bought relatively low value goods but nevertheless expensive enough that the customer may not have the ready funds to pay up front, for instance, a new sofa, fridge, gym membership or, increasingly, clothing. Up until now, if the repayment terms result in the customer paying off the total amount owed in 12 or fewer interest free instalments within 12 months, then the agreement (short-term interest-free credit or STIFT), and the provider of the credit, whether a retailer or a third-party lender, fell within an exemption from financial regulation.

But, with the growth particularly of online sales of low value goods where payment is split into instalments and sometimes with a period before the first is due, there were concerns about the way the credit was promoted, consumer understanding and the potential for consumer harm through high levels of indebtedness because there the lender has no obligation to consider whether the consumer can afford the payments.

The Government did not want to stop the traditional credits typically offered in-store by retailers, or for memberships, but it did want to protect consumers. It struggled to decide where the boundary should be. After several years, and a few consultations, the current Government has followed its predecessor's policy decision. The upshot is that in principle any lender to a consumer under STIFT arrangements will need to be authorised by the FCA unless they are themselves the provider of the goods or services the arrangements relate to. 

What will no longer be exempt?

The "BNPL exemption" in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 exempts from the definition of a regulated credit agreement (lenders under regulated credit agreements must already be FCA authorised) an agreement with an individual or certain small partnerships or unincorporated bodies where:

• The agreement is a "borrower-lender-supplier" agreement for fixed-sum credit – the lender and the supplier might, or might not, be the same person
• The borrower will repay the credit in no more than 12 instalments
• The borrower must make all the payments within a period of no more than 12 months from the date of the agreement
• The credit is free of interest or any other charge.

Currently, where these conditions are met, only agreements financing the purchase of land, conditional sale or hire-purchase agreements or financings secured by a pledge will fall within the scope of regulation. Going forwards, though, all these conditions must still apply, but also the exemption won't be available where the lender and the supplier are not the same person, or where the original supplier sells the goods or services to the lender, who then makes the loan to the consumer. These now-to-be non-exempt arrangements will be known as "regulated deferred payment credit agreements".

So I have to get authorised to offer my customers interest free credit?

Not necessarily. Simply put, let's say you are a white-goods retailer and you offer your customers the ability to pay you in 12 interest free instalments over the year for an appliance they buy from you. If you yourself are the lender, then you will still fall within the exemption. But if you have an arrangement with a third party lender, then that lender won’t be able to rely on the exemption, even if they effectively buy the goods from you before making the loan. That third party lender will have to get authorised – even if it's a company within your own group and not an organisation whose main business is lending.

There are still some other exemptions – for employer loans to employees, insurance premium finance and registered social landlords financing goods and services they provide to their tenants or leaseholders.

And it's not just about the lending – in principle any business that introduces customers to lenders who will lend under a regulated credit agreement needs to be authorised to carry out that credit broking activity. However, the law will exempt broking activities that relate to regulated deferred payment credit agreements unless the arrangement relates to a doorstep sale.

So, the intention is that the lowest risk arrangements, such as a furniture store offering interest free finance for a dining set a customer buys from it, or a gym allowing monthly payment of an annual membership fee, or an employer offering a season-ticket loan, will still be exempt.

When is all this happening?

The draft legislation needs the approval of both Houses of Parliament. Once it has that, it will go onto the statute books, and then the FCA will have 12 months to draft, consult on and finalise its rules.

Any existing lender that will need authorisation will need to apply for authorisation, and will be able to register in the first instance for a transitional permission. This will allow it to carry on its business while going through the full authorisation process. Firms that don't register will have to stop lending. The expectation, then, is that lenders under regulated deferred payment credit agreements will need to be authorised, or in the temporary permissions regime, by summer 2026.

The FCA will make rules specific to BNPL products and services – they won't be exactly the same as its rules for other regulated credit agreements. The idea is that they will be bespoke and proportionate. We know already that most of the detailed rules in consumer credit legislation on information disclosure won't apply. We expect the FCA to consult soon on both how it will deal with applications for authorisation and on what its rules will say. There will be changes not only for newly authorised firms but also for existing authorised consumer credit lenders, who will need to apply the right rules to different types of regulated lending.

What should businesses do now?

Any business that is not FCA authorised and which provides STIFC for which it is currently exempt from the need for authorisation, or uses an unauthorised lender to provide the credit, should act now to review its business model and assess whether it will be affected by the narrowing of the exemption. If it will, it will need to consider whether to change its business model or its business partners to ensure it will continue to comply with the new laws once they take effect or whether to prepare to apply for FCA authorisation.

Need help?

If you'd like more detail on the changes and how they will affect your business, please contact any of the authors, or your usual Womble Bond Dickinson contact.

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This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.