Buy-Now Pay-Later: The government’s proposed BNPL legislation is here! What next and what does it mean for you?
On 14 February 2023, HM Treasury (HMT) published its latest consultation on the UK regulation of Buy-Now Pay-Later (BNPL).
HMT appear to be taking a pragmatic approach to BNPL regulation, taking into account stakeholder feedback. HMT has confirmed that the scope of regulation should be limited to agreements that are offered by third-party lenders. There will, however, be anti-avoidance mechanisms to prevent third party lenders from trying to circumnavigate the new rules.
HMT are also proposing to introduce a temporary permissions regime, acknowledging the significant impact of this legislative change.
This article summarises they key points raised in the consultation paper and what this means for existing BNPL third party lenders.
Should you have any questions please get in touch with a member of the team and we would be delighted to help.
Fixed sum credit Vs running account credit
HMT has confirmed that the scope of regulation should be limited to agreements that are offered by third-party lenders.
Agreements which have previously been exempt under Article 60F(2) Financial Services and Markets Act 2000 (Regulated Activity) Order 2001 (RAO) (A60F(2) Agreements) - borrower-lender-supplier agreements for fixed sum credit – will be regulated under the new rules. This is if they are:
- interest-free, repayable in 12 or fewer instalments within 12 months or less;
- where the credit is provided by a person that is not the provider of goods or services which the credit agreement finances (i.e. third-party lenders); and
- not exempt (see more on exemptions below).
Article 60F(3) RAO agreements for running account credit will continue to be exempt. Despite initial concerns that by regulating A60F(2) Agreements, lenders may try to reconfigure lending products to “fit” into the Article 60F(3) exemption, HMT has determined that lenders wouldn’t be able to replicate the effect of Article 60F(2) lending using the Article 60F(3) exemption.
HMT said it recognises that this is an innovative market with the potential to develop quickly and so will monitor it closely and intervene as necessary to ensure any potential consumer detriment is avoided.
HMT has raised specific concerns with third party lenders trying to avoid regulation by structuring agreements so that they become the merchant in the transaction they are financing, having purchased the goods from the original supplier.
To prevent this, HMT proposes to include an “anti-avoidance mechanism” within the new legislation. This “mechanism” will capture agreements that are provided by a third-party lender to finance purchases from a merchant, but where the merchant has an arrangement with the third-party lender under which the merchant agrees to sell the goods to the lender at the point when the agreement is taken out.
Do any exemptions remain?
Where consumer detriment is not likely, HMT has confirmed these exemptions will remain including those exemptions which relate to invoicing, trade credit, fixed sum credit to pay insurance premiums and employee/employer lending.
HMT has also confirmed that merchants which introduce customers to the newly regulated third party lenders will be exempt from credit broking regulation.
HMT proposes to extend the scope of the financial promotions regime to apply to unauthorised merchants offering BNPL as a payment option.
Without doing this, the financial promotion restriction set out in the RAO would not apply to unauthorised merchants offering a third party lender’s newly regulated agreements because they would be referring consumers to a (newly) authorised lender. This would allow unauthorised merchants to publish financial promotions without prior approval by an authorised person which could be detrimental to consumers.
To counter this, HMT intends that those merchants will be required to obtain approval for financial promotions relating to the newly regulated agreements and has drafted legislative amends to Article 15 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to that effect.
HMT hopes that by imposing this restriction, lenders will be inclined to provide merchants with their pre-approved marketing materials rather than merchants (with less knowledge about the regulatory requirements) preparing their own.
HMT has said they plan to do away with the CCA’s pre-contract information requirements in respect of the newly regulated agreements, as an FCA rules-based regime will be more proportionate given the level of risk associated with these agreements. A less prescriptive and more flexible approach to pre-contract requirements under the FCA regime will suit the nature of the credit products much better.
For firms who offer both regulated and unregulated credit and have historically treated Article 60F(2) Agreements as regulated credit agreements for ease from an internal processing perspective, these firms can continue to comply with the CCA pre-contractual requirements, provided that the information is presented in a “clear, fair and not misleading” manner and complies with the FCA’s rules on pre-contractual information.
Transition and Temporary Permissions Regime
HMT proposes to put a transition period in place for firms to familiarise themselves with the new FCA rules and to get their business model amended ahead of regulation day. They also propose to implement a temporary permissions regime (TPR) which has been designed to enable firms to transfer into the new regulatory regime before seeking full authorisation at a future date.
Firms in the TPR will be deemed to be authorised and will be permitted to undertake the relevant regulated activities relating to newly regulated agreements and will need to comply with the relevant FCA rules. The FCA will be able to supervise those firms and take enforcement action as necessary.
New agreements that are entered into/brokered by firms in the TPR will be regulated credit agreements. Agreements that were entered into before regulation day will remain as unregulated, exempt agreements.
Third party lenders currently offering exempt agreements who do not have the appropriate FCA authorisation for lending are explicitly called out as a category of firm which will need to enter the TPR should they wish to undertake newly regulated activity on or after regulation day
The sequencing is said to be as follows:
- This consultation closes on 11 April 2023.
- Draft BNPL legislation to be published with HMT’s response to this consultation paper, which is intended to take place in 2023.
- FCA to publish a consultation paper on its proposed conduct rules and rules for firms operating on a TPR, including specifying the window in which a firm can register for the TPR.
- FCA to draft rules for the TPR and firms will be invited to register for the TPR.
- TPR and Regulation Day to commence on the same day.
- During the TPR, firms will be given “landing slots” in which they will be asked to submit their application to the FCA for authorisation.
Other than HMT confirming that they intend to finalise the legislation in 2023, HMT has not provided any key dates surrounding “regulation day” or implementation of the TPR, which is unlikely to be before 2024.