Buy Now, Pay Later: Next steps towards regulation
The government has published its response to its consultation on the regulation of buy now pay later (BNPL) and short-term interest-free-credit (STIFC) products. The response follows a consultation from late 2021 and the outcome of the Woolard Review, which focussed on the potential detriment suffered by consumers using BNPL and STIFC products. Please see here for a summary of that review.
What is in scope?
The government is looking to bring BNPL and STIFC products within the scope of financial services regulation by targeting the current legislative exemption that applies to both BNPL and STIFC products, which providers of these products rely on to avoid regulation under existing consumer credit rules. In particular, the government is focussed on products that benefit from the current exemption under article 60(F)(2) of the Regulated Activities Order, commonly referred to as the “12/12” (no more than 12 payments within no more than 12 months, no interest or other charges levied) exemption.
The response states that consideration will also be given to products that would benefit from the exemption for interest-free running account credit under article 60(F)(3) of the Regulated Activities Order, where one payment is made in a period no longer than 3 months and there is no interest or other significant charges.
The consultation distinguishes between BNPL and STIFC as follows:
- BNPL products are generally taken out online with consumers having an overarching relationship with a third party lender, under which multiple low value credit agreements are made.
- STIFC products are generally offered in-store and see consumer take out a single higher value credit agreement with the lender, who may be the merchant or a third party.
The response document discusses the difference in nature and prospective regulatory treatment of BNPL and STIFC and finds that STIFC products appear to carry the same potential risks for consumer detriment as BNPL as the lines between the two products become more blurred. The types of potential consumer detriment that the response notes includes affordability of products and the lack of creditworthiness assessments, consumer understanding of products, the advertising to certain demographics of customers and usefulness of financial products.
Certain types of agreement are to remain out of scope of future regulation, such as invoicing, as regulation would cause too much day-to-day business interruption, and lending arrangements between employers and employees.
Approach: key principles
Proportionality is emphasised in the consultation response. The government states that its intention is to bring BNPL and STIFC products into the regulatory sphere, in a manner which is proportionate and targets those products that carry the potential for consumer detriment without impeding the utility of financial offerings.
It is the government’s stated view that notwithstanding the evidence of potential consumer detriment in relation to these products, such products are inherently lower risk than interest bearing credit products and can be a useful way for consumers to manage their finances.
The key components of the government’s proposals are as follows:
|Credit broking||Businesses who introduce customers to lenders with a view to the customer entering into a regulated credit agreement are carrying out a regulated activity under current rules. The government considers that merchants who offer BNPL agreements as a payment option should not be brought into the scope of credit broking regulation, as this would be disproportionate to the potential consumer detriment by imposing significant costs to retailers. |
Certain limited exceptions to this exemption may be necessary, such as domestic premises suppliers, i.e. merchants who offer services when visiting customers in their homes.
|Advertising and promotions||The financial promotions regime should apply to merchants offering BNPL and STIFC products as payment options. This means that merchants will be required to obtain approval for promotions of BNPL products from an authorised person, which might be the BNPL lender partner, and that such promotions will need to be fair, clear and not misleading.|
|Pre-contractual information||FCA rules around pre-contract disclosure and adequate explanations will apply, but pre-contractual provisions dictating form and content currently set out in the Consumer Credit Act will not apply, as the HMT response takes the view that more flexible FCA rules are better suited to these types of product.|
|Form and content||It is appropriate for rules on form and content of agreements to be prescribed in legislation (particularly given that current regulation states that if these requirements are not complied with loans may be unenforceable without a court order). The government may consider a tailored approach rather than the current requirements that apply to regulated loans given the lower risk for BNPL and STIFC products. The government intends to prescribe the form and content of BNPL and STIFC agreements in secondary legislation made under the consumer credit act.|
|Execution||The existing provisions in section 61 of the Consumer Credit Act around improper execution – where a loan is enforceable only with a court order if the signed document does not comply with form and process requirements about what is presented for signature and how - will apply in relation to BNPL and STIFC products that are brought into scope.|
|Creditworthiness||The FCA’s rules requiring lenders to assess customer creditworthiness should apply to products under scope. The FCA should decide if these rules need tailoring for BNPL products. The government’s view is that clear, consistent and timely credit reporting will be “an important part of the responsible provision of BNPL products.” Reporting will be considered as part of the wider FCA Credit Information Market Study, an interim report on which is expected in September 2022.|
|Arrears, defaults and forbearance||The FCA’s rules on the treatment of borrowers in default and the rules around the provision of information to those borrowers offer vital consumer protection. As such, the requirements contained in the Consumer Credit Act in this regard will apply to the BNPL mand STIFC products that are brought into regulatory scope, although the requirements around post-contractual information may need to be tailored to these products given their short-term nature.|
|Section 75 Consumer Credit Act (which allows customers to claim against lenders in the same way as they can against a merchants in respect of breach by merchant)||Section 75 provides important consumer protections and so should not be disapplied for BNPL and STIFC products that are brought under scope of regulations, noting though that the minimum spend of GBP100 to avail of section 75 protection may not apply to many BNPL or STIFC purchases.|
|Redress||The jurisdiction of the Financial Ombudsman Service should apply to BNPL and STIFC agreements. There will be further consideration as to whether there will be a different charging structure, given that the current Financial Ombudsman Service case fee of GBP750 is disproportionate to the average customer transaction value of GBP50 - GBP100.|
|Small agreements||All BNPL agreements (regardless of value) will fall under regulation in the same way – this approach should alleviate concerns that if the Consumer Credit Act’s “small agreements” disapplication applies, lenders could use this to charge interest on credit of GBP50 or less that would not be subject to Consumer Credit Act requirements.|
As the legislation that will implement the new regulatory regime governing BNPL and STIFC products, the government intends to publish draft legislation at the end of 2022 which will be subject to a second consultation, with a view to presenting secondary legislation before Parliament in mid-2023.
The government has sought further views by 1 August 2022 on merchant provided STIFC products in order to further inform the scope of related regulation.
These timelines are intended to allow for time for the FCA to consult on its approach for the new regulatory regime. The response also discusses a transitional regime for bringing BNPL and STIFC service providers into new regulation.
Until the new regulation is brought in, the government and the FCA will continue to monitor the use of BNPL and STIFC products and assess whether further interventions, such as the steps taken by the FCA to require certain firms to modify their consumer contracts, are necessary and may be made under existing powers.
If you have any questions on this article, please contact Sophie Lessar.