FCA threatens BNPL bosses with jail time and fines as Laybuy nears profitability

The Financial Conduct Authority (FCA) has written to ‘buy now, pay later’ (BNPL) execs warning they could face jail time if they fail to comply with financial promotion rules.

Although not all BNPL ‘agreements’ are required to be authorised by the FCA, it said that financial promotions do fall within its jurisdiction, and therefore must still comply with “certain regulatory requirements”, in a letter seen by AltFi.

As first reported by City AM, the FCA has warned that communication or explainers about products constitute “financial promotions” and so fall under its remit.

The letter outlined that financial promotions must be “clear, fair and not misleading”, with the offence for non-compliance carrying a maximum sentence of two years imprisonment, a fine, or both.

The recent clamping down of regulations follows on from initial correspondence from the FCA to the British Retail Consortium and BNPL firms such as Clearpay,Klarna and Laybuy in August, which was then sent to hundreds of retailers, AltFi understands.

BNPL firm Laybuy confirmed that it had received a letter from the City watchdog regarding financial promotions.

“Since the FCA first announced in August that promotions by BNPL providers were required to comply with the Financial Services and Markets Act, we have been undertaking an urgent review to ensure all of our promotional material is compliant,” a spokesperson from Laybuy told AltFi.

“Where necessary, we are making these changes.

“As a responsible lender, we welcome regulation of the sector and encourage the Government to look at how it might bring forward the regulatory timetable to not only provide a clear set of rules, but to also lift the standards of the entire sector to better protect vulnerable consumers." 

The Government has yet to set out specific rules for how firms should regulate their BNPL products.

The FCA laid out in the letter, however, that any financial promotions must be balanced, understandable to the “average member” of the group it is directed to and must not “disguise, omit, diminish or obscure” any important information.

A senior source at a BNPL firm reportedly told City AM that the FCA had identified a “loophole” to try to enforce regulation on firms.

“That loophole is an incredibly broad definition of what a financial promotion is,” the source 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 news comes as Laybuy reports that it remains on track to reach profitability by the end of the financial year in March.

“We have always said that Laybuy is the most responsible of BNPL providers and we practice what we preach,” Laybuy managing director Gary Rohloff said.

“Over the past quarter, we’ve tightened our credit policy and alongside investment in fraud tools, we’ve seen a decrease in customer defaults. There is a cost of living crisis and we need to make sure that BNPL is lent appropriately.”

Laybuy said that as part of its investment in fraud and credit risk management tools, as well as a focus on “improving the quality of its customer base” it has seen a reduction in default rates, from 6.06 per cent in Q4 FY22 to 2.39 per cent in Q2 FY23.