Latest on Buy-Now Pay-Later regulation as government confirms plans

1st July 2022

Jeanette Burgess, consumer credit expert and Walker Morris Head of Regulatory & Compliance, considers the government’s recently confirmed plans to strengthen regulation of interest-free Buy-Now Pay-Later (BNPL) credit agreements.

What has happened?

On 20 June 2022, the government published its much-anticipated response to the October 2021 consultation on regulation of BNPL products. See our earlier briefing on the proposals and their potential impact on established users of the article 60F(2) exemption [1].

In summary, the response provides that:

• In a significant shift from its earlier position, the scope of regulation should 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 the scope further to capture STIFC provided directly by merchants where it is offered online or at a distance, but says that further stakeholder engagement is needed to fully understand the scale of this market.

• Exemptions for specific agreements will be allowed where there is limited risk of potential consumer detriment, and where regulation would otherwise adversely impact day-to-day business activities.

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

Read on to find out more.

Why?

In the consultation, the government drew a distinction between unregulated BNPL agreements and STIFC arrangements, both of which use the article 60F(2) exemption. It recognised that while STIFC, especially when provided by third parties, appeared to have some of the same potential risks for consumer detriment as BNPL, it did not share all the risks for consumer detriment seen in the BNPL market.

The government said at the time that it had not seen substantive evidence of widespread consumer detriment arising from this type of lending and that it was minded to draw the scope of regulation so that such credit agreements could continue outside of the regulatory boundary. However, as a result of the consultation responses received, the government’s view now is that the scope of regulation should be expanded beyond the BNPL-only scope proposed previously. The responses pointed to three compelling reasons in favour of a wider scope to incorporate the majority of STIFC:

• The increasing similarities in the key features and real-world usage of BNPL and STIFC demonstrates the need for consistent protections for products with the potential to be offered alongside each other. Respondents identified that STIFC providers are increasingly lending more online rather than in-store and that STIFC and BNPL agreements are being increasingly used to finance similar types of goods and services and are potentially offered to consumers alongside each other at checkout.

• The potential future development of BNPL and STIFC markets further blurs the boundaries between them. Regulation needs to futureproof against likely developments and ensure that BNPL firms cannot artificially change their business models solely to avoid regulation.

• The diminishing distinction between BNPL and STIFC increases the need for consumer clarity on the rights and protections they can expect.

Exemptions

The widening of regulatory scope will be subject to a number of exemptions. The government recognises that some arrangements do not present a substantive risk of consumer detriment, and regulation is likely to hamper day-to-day lending and the provision of useful forms of credit. The following types of arrangement will continue to be exempt:

• Invoicing – arrangements where deferred payment is offered directly by a provider of goods or services to a consumer where it is interest-free and repayable in a single instalment, or where a deposit is paid and the balance of the cost due is repayable in a single instalment, will be exempt

• Interest-free agreements which finance contracts of insurance

• Charge cards

• Trade credit

• Employer/employee lending – most interest-free credit agreements made directly between an employer and employee are likely exempt under article 60G of the Regulated Activities Order. To ensure that similar arrangements facilitated by third-party lenders are treated in the same way, agreements offered by them but facilitated by an employer will also remain exempt from regulation.

Proportionate regulatory controls

The consultation set out the government’s view that while there is evidence of potential consumer detriment, BNPL products are inherently lower risk than interest-bearing credit products, and they can be a useful tool for consumers to manage their finances when used appropriately. It is therefore important that the regulatory controls which are applied to agreements brought into regulation are proportionate to the risk they present, while also providing sufficient consumer protection. The response confirms the government’s position on the following controls:

• Credit broking: The government intends to exempt merchants offering agreements which are brought into regulation as a payment option from credit broking regulation. It also intends to provide a limited exception for domestic premises suppliers, so that they will require FCA authorisation.

• Advertising and promotions: The financial promotions regime should apply to merchants offering BNPL and STIFC products as payment options requiring all such promotions to be issued or approved by an FCA authorised firm. The FCA will consult on rules proposals in due course.

• Pre-contractual information: The government still considers that disapplication of CCA pre-contractual provisions and reliance on FCA rules is proportionate for the article 60F(2) agreements that will be brought into regulation, given the level of risk associated with them. A more flexible FCA rules-based regime for pre-contractual disclosure is better suited to the way in which these products are used.

Consideration of the information requirements in the CCA will form a key part of the government’s recently announced commitment to reform the CCA.

• Form and content of the credit agreement: The government still considers that the requirements on the form and content of BNPL and STIFC agreements should be prescribed in legislation made under the CCA, but there should be a tailored approach given the lower risk involved in BNPL and STIFC agreements and how they tend to be used. There will be further stakeholder engagement on the requirements.

The government understands that third-party STIFC providers are currently likely to treat their exempt lending as though it were regulated. To avoid imposing undue burdens on them it will consider how to ensure that agreements will be compliant and properly executed should a lender choose to apply the existing CCA requirements for currently-regulated agreements to the article 60F(2) agreements brought into regulation (same applies in relation to pre-contractual information).

• Improper execution: The government intends that the section 61 CCA requirements on improper execution will apply in relation to BNPL and STIFC agreements brought into regulation.

• Creditworthiness and credit files: Proportionate regulation of agreements brought into regulation includes the application of the FCA’s current rules on creditworthiness assessments. It is for the FCA to decide if the rules need to be tailored for these products. Clear, consistent and timely credit reporting across the three main credit reference agencies will be an important part of the responsible provision of BNPL products and the government is engaging with the credit reference agencies as they develop their approach to reporting BNPL on credit files. In parallel, the FCA is undertaking its cross-market Credit Information Market Study, with an interim report expected in summer 2022.

• Arrears, default and forbearance: The FCA’s rules on the treatment of customers in default or arrears and the statutory requirements on provision of information to consumers in arrears and default are vital consumer protections. The CCA requirements on the treatment of consumers in financial difficulty will apply to the BNPL and STIFC agreements brought into regulation (possibly with some tailoring of the post-contractual information requirements). The FCA will consult on its rules proposals in due course.

• Section 75 of the CCA: This important and well known consumer protection measure should not be disapplied for agreements brought into regulation.

• Small agreements: The government intends to disapply section 17 of the CCA on small agreement (less than £50) exemptions for agreements brought into regulation.

• FOS jurisdiction: Proportionate regulation of BNPL should include the ability for consumers to access the FOS for issues concerning the conduct of lenders. The government will continue engaging with the FOS about concerns around the potential disproportionality of the FOS case fee for BNPL agreements.

Next steps

While the government intends to extend the scope of regulation to STIFC agreements when they are provided by a third-party lender, it has not yet made a final decision on what to do about including STIFC provided directly by merchants online or at a distance (it has already confirmed that it does not think regulating STIFC provided directly by a merchant in-person in-store would be proportionate).

The government is undertaking further stakeholder engagement until 1 August to further develop its understanding of this part of the market. In particular, it wants to hear about:

• Scale – including the potential number of merchants providing STIFC themselves, both in-person or online or at a distance, and the types of sectors they operate in

• Operation – including the way in which merchants administer and manage the provision of STIFC.

The government is particularly keen to hear comments in relation to those sectors in which responses to date indicate such credit may be offered, such as dentistry, healthcare, education, home improvements and maintenance, sports clubs, vehicle repair and potentially SME retailers.

The final decision will be set out alongside a consultation on the detail of draft legislation by the end of the year. The government then aims to lay secondary legislation in mid-2023, after which the FCA will consult on its approach.

Practical implications and how we can help

Affected businesses will need to take stock of their current practices and arrangements in light of the government’s response, identify gaps and plan/adapt accordingly to comply with the upcoming changes. While the further consultations on draft legislation and FCA rules are still some months away, the government recognises in its response that lenders offering agreements of the type that will be brought into regulation are already preparing and adapting their business models in anticipation, and have started sharing data on agreements with credit reference agencies. Some have already engaged with the FCA and agreed to change terms in their consumer contracts.

While the government refers to a (yet to be set out) transitional period, the impression is that it is unlikely to be lengthy. Businesses can prepare now by reviewing the response, in particular the planned regulatory controls, and considering to what extent they already comply and where changes will need to be made. Where possible, they should start to implement changes now, in good time for the onset of regulation.

Firms operating in the STIFC market are strongly encouraged to provide their comments as the government ponders regulation of STIFC provided directly by merchants online or at a distance.

Please do not hesitate to contact Jeanette if you have any queries or concerns about any of the points covered in this briefing, including what the changes mean for you and your business.

[1] Article 60(F)2 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (Regulated Activities Order)