New proposals to regulate Buy Now Pay Later and other updates on consumer credit and mortgages
Insight
Financial Institutions 360 – Q3 2024: consumer credit and mortgages update
Read other sections of this edition of the Financial Institutions 360:
Buy Now Pay Later
On 17 October the Treasury published a consultation on regulating the Buy Now Pay Later (BNPL) market. BNPL products currently sit outside regulation, which has meant that, among other things, firms do not need to conduct any affordability checks or provide prescribed information to customers.
The Treasury published a consultation on regulating these products last year but shelved them due to political pressure. The Treasury has now published a statutory instrument (SI) which will amend the Regulated Activities Order (RAO) to bring such arrangements (but not similar delayed payment agreements provided by, for example, schools) within the FCA perimeter. The aim is to lay the SI early next year, with the regime coming into force a year later. This will give the FCA time to develop its own rules for the sector.
The FCA has welcomed the publication in a statement, in which it says it will put in place a temporary permissions regime to allow firms to continue their BNPL activities while they go through the authorisation process.
Financial resilience of consumer credit firms
On 24 October 2024, the FCA published a multi-firm review (MFR) of the financial resilience of consumer credit firms and non-bank mortgage lenders. During H2 2023 and H1 2024 the FCA conducted an MFR of a sample of consumer credit firms and non-bank mortgage lenders, assessing their approach to financial resilience as well as the potential for consumer harm. The sample covered a wide range of business models.
Firms that were part of the review have received feedback and the FCA has also set out general feedback for firms:
- The FCA noted that it has been a period of economic change, including rising inflation and interest rates, and some firms were not prepared for this changing economic environment.
- Some firms had an inadequate approach to identify the risks that could affect their business, which led to a failure in measuring and monitoring such risks.
- Firms used a variety of approaches to identify and measure the inherent risks in their businesses, some with more success than others, often related to their size. Most firms did not have a fully developed risk management framework.
- Some firms did not undertake any stress testing, or did so but with only limited stress factors. The firms that relied on their base business plan projections alone often suffered the greatest impact on their profitability during the recent changing economic climate.
- Firms should consider the scenarios leading to financial stress, explore recovery options and plan for winding down the business in an orderly way.
The review also sets out observations relevant specifically for consumer credit firms and non-bank lenders.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2024
