To date, many BNPL arrangements fall within an exemption in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”) concerning interest-free credit and can avoid being unregulated. However, following concerns raised in The Woolard Review HM Treasury is now consulting on bringing unregulated BNPL products within the regulatory perimeter.
Which interest-free credit agreements may now be brought within scope of regulation?
The consultation notes that invoicing will remain unregulated, that is to say, it will still fall within the relevant RAO exemption.
However, it is proposed that Bay Now Pay Later (BNPL) arrangements would be brought within the scope of regulation. BNPL arrangements are described in the consultation as arrangements that split into several equal amounts the cost of purchase – typically lower-value consumer goods – from a merchant which are then taken at regular intervals, typically by a third-party provider online and over a short period of up to 4 months. Also captured within BNPL are simple deferral arrangements.
Some other short-term interest-free credit arrangements may have similar characteristics to BNPL (albeit this type of credit is more commonly offered over a full year and 12 instalments, reflecting the higher value of the underlying goods or services that are typically paid for using these arrangements) and be subject to similar concerns around consumer detriment. However, as short-term interest-free credit has been around for decades and there is no substantive evidence of widespread consumer detriment arising from this type of lending the government is minded to keep such credit agreements outside of the regulation. Whether the proposed legislative changes will achieve this remains to be seen.
Will your products fall into the scope of regulation?
There are two proposals under consideration. The first is for merchants providing interest-free credit directly to consumers to remain exempt while making third-party lenders providing interest-free credit for such transactions subject to regulation.
The second proposal concerns the nature of the agreement and the nature of the relationship between the consumer and the lender. Lenders that offer accounts to consumers, under which the lender agrees to finance one or more transactions but where any repayments made are toward specific agreements made as part of that relationship would be brought within scope of regulation.
What are the consumer detriment concerns driving these proposed changes?
While the interest-free nature of BNPL is inherently lower risk than interest-bearing products and provides a valuable mechanism to spread payments for many consumers, there are concerns around consumer detriment. The main concerns are set out below, and HM Treasury is seeking further evidence of this to inform its final policy decisions.
What regulatory controls would apply to credit brought within scope of regulation?
Credit broking: the intention is that there would be an exemption so that merchants introducing consumers to lenders for BNPL credit would not need to be authorised to carry on the regulated activity of credit broking. However, the exemption would not extend to merchants that sell goods or services when visiting customers at their homes.
Financial promotions regime: retailers and other merchants would need to obtain approval for promotions of BNPL products from an authorised person (which could, but does not have to be, their BNPL lender partner).
Pre-contractual information: section 55 of the CCA would be disapplied, and BNPL credit agreements would only need to satisfy the FCA rules set out within the FCA Handbook at CONC 4.2.
Form and content of the agreement: section 60 of the CCA and subsidiary regulations would not be appropriate for BNPL agreements, so bespoke legislation is proposed to cover the form and content of such agreements.
Improper execution: it is presently unclear whether CCA requirements concerning improper execution would be applied to BNPL agreements.
Creditworthiness assessments: it is anticipated that the FCA’s current rules on creditworthiness assessments (which cover both credit risk and affordability) would be applied to BNPL agreements, with the FCA to consider whether any tailoring would be required. HM Treasury will also work with credit reference agencies to find an appropriate and workable solution to how BNPL may be reported on consumers’ credit files.
Arrears, default and forbearance (FCA rules) + CCA requirement on firms for consumers in financial difficulty: it is anticipated that regulation of BNPL would include some requirements around how firms treat customers in financial difficulty, potentially with some adaptations to ensure that the objectives for proportionality of the regulation of BNPL are met.
Creditor liability in relation to goods and services: section 75 of the CCA makes a creditor jointly and severally liable in certain circumstances for a supplier’s breach of contract or misrepresentations for goods or services. For section 75 to apply, the item or service purchased using the credit must be between £100 and £30000. The government is considering applying this requirement to BNPL agreements.
Small agreements: BNPL agreements for credit of less than £50 would not benefit from the exclusions for small agreements under section 17 of the CCA.
FOS and redress: it is intended that consumers would be able to bring a complaint relating to a BNPL agreement to the FOS.
Looking ahead…a few practical considerations
For retailers, other providers of goods and services:
If you offer BNPL:
- If you offer credit yourself, you are likely to remain unregulated
- You may need to consider obtaining a credit-broking licence if you offer BNPL when visiting customers’ homes
- You may need to have arrangements in place for your BNPL ads to be approved by an FCA “authorised person” Look out for our next article on FCA, ASA and CMA requirements for these ads
- If you use a third-party lender, you should ensure arrangements are appropriately structured to avoid unnecessary exposure
- You should ensure you negotiate adequate protection in your arrangements with your BNPL provider, including in relation to authorisations held and satisfaction of regulatory requirements
If you offer interest-free short term credit:
- You will need to review your agreements to check whether their terms bring you within the scope of regulation
Lenders:
If you offer BNPL:
- Consider whether you need to apply to be authorised by the FCA, seek additional regulatory permissions, or become an “appointed representative”
- You will need to have procedures in place for approving your client’s BNPL promotions Look out for our next article on FCA, ASA and CMA requirements for these ads
- You will need to identify the population of your clients and their underlying customers to whom you offer agreements that are becoming regulated
- You will need to update the terms of your BNPL agreements to comply with regulatory requirements
- You will need to put in place procedures to assess the creditworthiness of BNPL borrowers
- You may need to review your business model in the context of additional costs that may be incurred in relation to customers in financial difficulty, liability for goods and services, FOS redress
If you offer interest-free short-term credit:
- You will need to review your agreements to check whether their terms bring you within the scope of regulation
Next steps
The HM Treasury consultation closes on 6 January 2022. Following the consultation, the government will provide a summary of responses and set out next steps for regulation of BNPL. We will report further but the direction of regulatory travel seems clear. It’s time to start thinking about your strategy. Those who don’t do so now will be sure to pay later….
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