25th October 2021
On 21 October 2021, HM Treasury published its much-anticipated consultation on the regulation of Buy-Now Pay-Later (BNPL) products. Walker Morris consumer credit expert Jeanette Burgess considers in particular what the consultation means for established users of the article 60F(2) exemption  outside the BNPL definition.
The consultation follows publication earlier this year of the Woolard Review, a significant and wide-ranging review of change and innovation in the unsecured credit market . Recent years have seen rapid growth in the use of point of sale BNPL credit to fund purchases – especially in the online consumer goods market – a trend accelerated by the shift to online shopping seen during lockdown. These products rely on the exemption under article 60F(2) of the Regulated Activities Order, which facilitates delayed payment for goods and services provided the total is repaid over no more than 12 months by no more than 12 instalments and no interest or other charge is payable, to avoid FCA regulation.
While the review recognised that unregulated BNPL products can be a useful tool for managing personal finances, it identified a number of areas of potential consumer detriment and recommended that BNPL should be brought within the scope of FCA regulation. The government is committed to introducing balanced and proportionate regulation of BNPL and this consultation seeks views to inform final decisions about the shape and form of such regulation.
Importantly, the consultation makes the distinction – foreshadowed in the Woolard Review – between unregulated BNPL agreements and short-term interest-free credit arrangements, both of which avail of the article 60F(2) exemption.
Unregulated BNPL agreements typically split the cost of a purchase from a merchant, for example a retailer or a supplier of goods and services, into several equal amounts taken at regular intervals, usually monthly, weekly or fortnightly. They are increasingly used to purchase lower-value consumer goods, particularly fashion items, usually online.
More traditional, short-term interest-free credit arrangements include formal interest-free instalment loans, repayable in under a year, generally offered by a third-party lender and used to finance higher-value goods and services (such as white goods, electronics, furniture and dental and medical procedures), as well as those which allow monthly payments for club memberships and season tickets, more often offered by the provider of the goods or services without third-party involvement. This type of credit is typically used more often in-store than online.
The consultation recognises that invoicing arrangements between a supplier and customer, which permit the customer to pay for goods or services at a date later than the contractual due date, also generally fall within the exemption and form a crucial part of day-to-day business activity. The government is clear that any changes to regulation must not affect the ongoing operation of normal business practices such as invoicing, where any potential harms are far outweighed by the benefits to consumers and businesses.
The government is also aware that the article 60F(2) exemption is used to provide interest-free credit agreements to finance the payment in instalments of insurance premiums. It says it will consider how any regulation may interact with these products to ensure there are no unintended consequences, which implies that the new provisions will be structured in such a way as to continue to permit such arrangements outside the scope of the FCA regulatory regime.
Based on the current evidence, the provisional view of the rule-makers is that the nature of BNPL agreements is likely to present greater risk of consumer detriment than other agreements that fall within the exemption.
The key risk areas for customers using BNPL as identified in the Woolard Review include a lack of awareness that the product is credit, misunderstanding as to the features of an agreement due to the lack of standardised disclosures and the absence of affordability checks which may result in an increased risk of consumer over-indebtedness.
The consultation recognises that while short-term interest-free credit, especially when provided by third parties, appears to have some of the same potential risks for consumer detriment as BNPL, it does not share all the risks for consumer detriment seen in the BNPL market. These differences are reflected in the fact that this type of lending has been widespread for decades and has attracted limited scrutiny or concern from stakeholders, which may be due to the differing customer demographic. The government has not seen substantive evidence of widespread consumer detriment arising from this type of lending and says it is minded to draw the scope of regulation so that such credit agreements can continue outside of the regulatory boundary. It is keen to understand whether stakeholders share that assessment and we would anticipate that many businesses which use short-term interest-free credit for goods and services ranging from football season tickets to golf club memberships and from car servicing costs to private school fees will be keen to support this view to allow them to continue to trade outside the FCA perimeter.
The consultation goes on to consider the increasing crossover between BNPL and other short-term interest-free credit (where short-term interest-free credit providers offer their payment options alongside BNPL providers at merchants’ online checkouts) and the possible reasons behind the differences in risk level. The government finds it challenging to identify exactly what drives these differences, and therefore how the regulatory boundary can be drawn so that it avoids bringing into regulation those credit agreements where there is limited risk of harm. It seeks stakeholders’ input on whether they agree with the distinction the consultation draws between BNPL and other forms of short-term interest-free credit.
There is also an acknowledgement that extending the scope of regulation of BNPL will impact the merchants acting as introducers of the goods and services who will need to be separately regulated as credit brokers. The anti-competitive risks of precluding smaller traders from using BNPL due to the additional regulatory costs are flagged as an additional risk concern.
Finally, the consultation refers to how defining the scope of regulation will require the government to draw a boundary based on clear distinctions. With a degree of understatement, this is described as a ‘particular challenge’, given that some of the different risks these forms of credit pose to consumers may be driven by characteristics such as the culture of the individual businesses.
The government has been considering options for how that boundary could be drawn in practice, alongside its analysis of the drivers of risk. These include: (1) restricting the extension of regulation to interest-free credit agreements where there is a third-party lender involved in the transaction, and keeping arrangements directly between a merchant and a consumer exempt from regulation; and (2) defining a BNPL agreement as one where there is a pre-existing, overarching relationship between lender and consumer.
The government is concerned that the first option may draw the scope of regulation too widely, drawing in a large proportion of short-term interest-free credit alongside BNPL. It wants to understand what the impact of this wider scope might be, particularly as the additional burden of regulation on short-term interest-free credit providers may be relatively low given that they are often specialist finance firms conducting both regulated and unregulated business. It is concerned that the second option leaves open the possibility of a relatively small change to the BNPL product, so that it bears more similarity to running-account credit, in order to avoid regulation.
Given the extensive scope of the current use of the article 60F(2) exemption across a broad range of sectors affecting many millions of consumers it is crucial that any extension of the legislative regime is crafted with scalpel-precision to specifically address the harm identified by the explosion of the BNPL market. A blunt solution risks creating significant consumer harm and unwelcome opportunities for the exploitation of any loopholes to game the system.
The consultation closes on 6 January 2022. The government appears to be very much at the evidence-gathering and listening stage and is keen to ensure that its approach to regulation is proportionate. Getting change right in this area to properly target harm will be very challenging for the reasons we have outlined. Affected stakeholders are strongly encouraged to respond to the consultation. There is a real opportunity to shape the outcome and provide valuable input on where the future regulatory boundary should lie. This is particularly relevant where third-party lenders are involved, given the wide scope of the first option the government is considering. Questions on the scope of BNPL regulation, as discussed above, can be found in Chapter 2.
Please do not hesitate to contact Jeanette should you have any queries or concerns about any of the points covered in this briefing, including seeking practical advice or assistance on responding to the consultation.
 Article 60(F)2 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (Regulated Activities Order)
 See our earlier briefing