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What has happened?

In October 2021, HM Treasury published a consultation paper setting out the policy options to achieve a proportionate approach to the future regulation of BNPL (buy-now-pay-later) products. Please continue reading to learn the latest compliance consultancy updates.

This consultation paper is available to view here; it closed on 6 January 2022. Following the consultation, the Government provided in June 2022 a summary of responses and set out the next steps for its work on BNPL regulation.

The scope of regulation will capture BNPL and other currently exempt agreements (referred to as short-term interest-free credit (STIFC)) when they are provided by third-party lenders. The Government is minded to extend this scope to also capture STIFC provided directly by merchants where it is offered online or at a distance but has explained that further stakeholder engagement is necessary to fully understand the scale of the merchant-offered STIFC market.

The Government’s approach to regulatory controls for agreements that will be brought into regulation will tailor the application of the Consumer Credit Act 1974 to these products and the elements of lending practice most linked to potential consumer detriment.

Given the anticipated complexity of the legislation that will implement the new regulatory regime, the Government has assessed that it will be necessary to publish and consult on draft legislation, to ensure that it is achieving the policy objectives intended and that any residual issues can be identified and addressed. Following this, the Government will proceed to the final legislation. The Government aims to publish draft legislation around the end of the year. Following the second consultation, the government aims to proceed to secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime. This will enable the FCA to consult on its approach for the new regime and undertake a cost-benefit analysis.

BNPL is expanding fast, with a 2021 BBC report stating that more than 17 million UK customers have used a BNPL company to make an online purchase and that certain established brands are poised to enter the market, while BNPL technology is evolving so that some brands can be used to make any purchase on any site.

More recently, it was reported by the digital lending marketplace, Freedom Finance in June 2022 that growth in consumer credit is rapidly being outstripped by the boom in popularity of buy-now-pay-later lending products among consumers. Freedom Finance also stated that BNPL is the first wave of growth of an emerging embedded finance sector, reacting to consumer demand for online integration of financial services.

What do you need to do?

In 2021, HM Treasury announced its intention to bring interest-free BNPL products within the FCA’s regulatory perimeter after the Woolard Review had highlighted the probable risk of consumer detriment. The consultation paper was intended to ensure that the scope of regulation is aligned as closely as possible to target products where there is potential for consumer harm and it sought views on a range of regulatory controls that could be put in place for BNPL regulation.

Credit Broking
Brokers of BNPL products and other short-term interest-free agreements are not currently “credit broking” because broking such agreements is not within the regulatory perimeter. This could well change when BNPL becomes regulated.

Future BNPL regulation could be accompanied by an exemption to ensure merchants (who are often sole traders or micro-SMEs) broking BNPL would not lead to the merchant having to be authorised by the FCA as a credit broker. This exemption would not apply to merchants carrying on this activity in customers’ homes.

Financial Promotions
Promotions of BNPL agreements will fall within the financial promotions regime. The Government is seeking to amend the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 to this effect.

Merchants would need approval for BNPL promotions from an authorised person to try to reduce consumer detriment from merchants not themselves being regulated.

Pre-contractual information
It is proposed that firms will need to comply only with FCA rules in this area, allowing section 55 (Disclosure of information) of the Consumer Credit Act 1974 to be disapplied. This is because section 55 contains detailed and inflexible requirements which are not appropriate to BNPL agreements, since

1. The interest-free products are lower-risk,
2. BNPL products are significantly smaller in size and duration than regulated consumer credit products (the average amount is £65 to £75), and
3. BNPL agreements are likely to be entered into online and with much greater frequency, so there is a high risk that the customer will not engage with long and detailed information disclosures.

Credit Agreements
Mainstream consumer credit agreements are considered inappropriate for BNPL and so bespoke legislation may be necessary on the form and content requirements for BNPL, to better suit the features of the product and how it is used by consumers in practice.

Creditworthiness assessments and customers in financial difficulty
There is currently no requirement to carry out creditworthiness assessments (on credit risk and affordability) for new customers entering into BNPL agreements. The FCA’s rules on creditworthiness would be applied to BNPL agreements, with the FCA tailoring them to BNPL if necessary. The Government intends to include requirements around how firms treat customers with financial difficulty and how BNPL agreements will be reflected on customers’ credit files.

Small Agreements
Small agreements are defined in section 17 of the Consumer Credit Act as regulated agreements for credit not exceeding £50, other than hire purchase or conditional sale agreement. Some parts of the CCA do not apply to small agreements and the Government is consulting on narrowing the scope of section 17 to ensure that CCA requirements apply to BNPL agreements under £50. This is because many BNPL agreements are for less than £50.

Section 75
Section 75 of the Consumer Credit Act 1974 makes a creditor jointly and severally liable in certain circumstances for a supplier’s breach of contract or for misrepresentations of goods or services. For section 75 to apply, the item or service purchased using the credit must be between £100 and £30,000. The Government is aware that some BNPL providers currently provide their own buyer protection schemes, but it is currently of the view that statutory protection could apply as part of the regulation of BNPL so that it is in line with other regulated credit agreements.

Financial Ombudsman Service
The Government’s view is that proportionate regulation of BNPL should include the ability for consumers to access the FOS for issues concerning lenders’ conduct.

Exemptions

Among the services expected to be exempt from future regulation are deferred payment (invoicing), interest-free agreements which finance contracts of insurance, charge cards, trade credit, and employer to employee lending.

How can we help you?

If you’d like to know more about how we can help you with your BNPL regulation, or with any other regulatory compliance consultancy issues, our expert team is here to help.

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.