Exclusive: FCA swoops on buy-now pay-later firms with financial promotion ‘loophole’

The City watchdog has written to buy-now pay-later chiefs warning they could face up to two years in jail if they fail to fall in line with financial promotion rules, as it uses a “loophole” to clampdown on the products despite not directly regulating them, City A.M. can reveal.

In a letter seen by City A.M., the Financial Conduct Authority, which is yet to draw up specific rules to regulate the deferred-payment products, has warned some BNPL bosses and retailers that any communication or ‘explainers’ on BNPL products constitute ‘financial promotions’ and therefore fall within its jurisdiction.

The crackdown follows a warning shot from the regulator in August to BNPL firms like Clearpay, Laybuy and Klarna that promotions must be “clear, fair and not misleading”. The regulator’s rules state that “any invitation or inducement to engage in investment activity” is capable of being a financial promotion. 

However, industry insiders have hit back at the move, claiming the watchdog has stretched the definition of financial promotion and is choking off BNPL firms’ revenue, after scores of retailers received similar letters from the FCA and revoked shoppers’ access to the payments products.

A senior source at one BNPL firm told City A.M. they are now facing a “horrific” run up to Black Friday and Christmas.

“The FCA has identified what can only be described as a loophole to try to enforce regulation on the sector. And that loophole is an incredibly broad definition of what a financial promotion is,” the person said.

“The FCA appears to have taken the position that any information that explains how the product works is a financial promotion and therefore needs to go through a regulated sign-off process.”

The regulator has issued a tight turnaround to firms which they say has not given sufficient time to hire ‘approved’ individuals or strike deals with regulated third-party firms to sign off the communication of products on websites.

A spokesperson for the regulator told City A.M. yesterday: “If content on a webpage is causing a consumer to engage it is likely to be a financial promotion and would need to be issued or approved by an authorised firm. 

“It is vital that all financial promotions are clear, fair and not misleading.”

Enforcement comes after the FCA and Treasury come under fire from some quarters over their speed of movement on BNPL and the fact the sector remains unregulated despite warnings of the “urgent” need for oversight more than 18 months ago.

Debt campaigners have been sounding the alarm over the unregulated nature of the products as consumers lean on credit and borrowing to cope with the soaring cost of living.

The Treasury announced a framework for regulation of BNPL products in June which includes enhanced affordability checks and inclusion within the Financial Ombudsman Service, but the FCA is not expected to fully regulate the space until 2024.