HM Treasury has published the long-awaited consultation on buy-now pay-later (BNPL) regulation, following the announcement on 2 February that the Government would implement the Woolard Review recommendation to bring interest free BNPL products within the scope of regulation. The consultation takes account of the need to calibrate the regulatory controls that should be put in place so that regulation addresses the potential for consumer detriment without unnecessarily limiting useful products.
Why isn't BNPL currently regulated?
Any person who enters into a regulated credit agreement as lender carries on a regulated activity under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO). Any person who conducts broking activity in relation to regulated credit agreements also carries on a regulated activity.
Currently, those who offer interest free BNPL products may do so under an exemption in the RAO for agreements that meet all the following conditions:
- Provide credit that is interest free and bears no other charges
- Under a borrower-lender-supplier agreement for fixed sum credit
- The sums borrowed must be repaid within 12 months
- The sums borrowed must be repaid in no more than 12 instalments.
So long as the product meets the conditions, neither the lender nor the broker carries on a regulated activity in offering or providing it.
What products does this cover?
These products typically are:
- Arrangements that split the cost of consumer goods and services into several equal amounts taken at regular intervals (but usually with a short repayment period) and arrangements which require payment only after a certain amount of time (often used in “try before you buy” scenarios), and which are commonly used online
- "Traditional" short-term interest free credit such as loans provided to help consumers to finance higher-value goods (these have been popular for many years for goods such as furniture and electrical goods, and are used more frequently instore than online, and the lenders are usually regulated) and those that allow monthly payments for memberships, season tickets and similar products
- Invoicing arrangements which allow for payment later than the contractual due date.
Treasury is most concerned about arrangements which fall within the first bullet. The growth in its use, especially for lower value and fashion items, and in the context of online sales, has caused concerns around, for example, the way the credit is promoted, consumer understanding of the product and the potential for it to create high levels of indebtedness though lack of creditworthiness assessments. Because of the unregulated nature of the product, there is also evidence of inconsistent treatment of customers who get into financial difficulties and the impact on the wider credit market of the lack of visibility of BNPL debts on credit files.
What is to be done?
It is clear that the risks of consumer harm in the increasing use of BNPL products in certain situations has to be addressed. However, Treasury is wary of using a sledgehammer to crack a nut, and wants to be sure it takes an appropriately proportionate approach to changing the regulatory perimeter.
It has considered how it can best achieve its aims, and has ultimately focussed on two possible routes, and now asks for views on the respective risks of the different models and explains the options it has considered, specifically:
- Restricting the extension of regulation to agreements where there is a third party lender, and
- Defining a BNPL relationship as one where there is a pre-existing relationship between the consumer and the lender.
Treasury feels that using the first option would create a clear boundary, and it would continue, for example, to allow gyms to let members pay in instalments and employers to provide season ticket loans, but it would bring within the scope of regulation a large proportion of short-term interest free credit which has largely operated problem-free under the exemption for years. So that could mean the end for a number of arrangements which are beneficial to consumers.
So that brings us to the second option. But here Treasury is concerned that this could be circumvented by changing the arrangements slightly to fall outside scope by turning them into agreements for interest and charge free running-account-credit, which benefits from a separate RAO exemption where the borrower makes payments in relation to specified periods not exceeding 3 months but does not make more than one repayment of the whole amount of credit provided in each period.
Consequences of bringing agreements within RAO scope
Treasury notes that, when currently exempt agreements fall within scope, merchants that offer the products would start to carry on the regulated activity of credit broking and would need to become authorised – which would come with significant burdens and cost. If, because of this, the merchants decided not to offer the financing option, this would limit consumer choice and may confer an unfair competitive advantage on larger merchants who are already authorised or who have the capacity to become so. As a result, Treasury would plan to accompany any extension of the perimeter in terms of the product with an exemption that would mean that merchants offering it would not need to become credit brokers.
Alongside any extensions to the regulatory perimeter, Treasury seeks views on whether the current controls around advertising of BNPL products are sufficient, whether they should be brought within the financial promotion regime and the effects of extending the regime in this way. The Woolard review noted several concerns at the way BNPL products are advertised, ranging from tapping into consumer behavioural bias, presenting the BNPL option as the default, and offering discounts for its use. The Advertising Standards Authority has already intervened and published guidance for the market, but consumer protections could be strengthened by applying the financial promotion regime to BNPL advertisements. But, again, there is an exemption that allows unapproved promotions for BNPL products offered by authorised lenders.
Treasury feels that removing the exemption, together with the proposed improvements to the financial regime more broadly, with the introduction of the approvers' gateway, could ensure effective oversight. Additionally, bringing the product itself within regulation would give the Financial Conduct Authority (FCA) the ability to police pre-contractual information to ensure it is clear, fair and not misleading.
In terms of customer documentation, Treasury feels that the full extent of Consumer Credit Act 1974 (CCA)-mandated pre-contractual information may not be appropriate for BNPL agreements and so the inflexible requirements of the CCA could be disapplied, with FCA rules being the proportionate regulatory model. Similarly, these agreements are likely to require bespoke form and content requirements.
Treasury also seeks views on whether the CCA provisions on improper execution and the FCA requirements on creditworthiness assessments should apply, and how customers in arrears or financial difficulty should be treated. It also considers that s75 protection should apply to any agreements that come within scope, and that the Financial Ombudsman Service should have jurisdiction over complaints.
Finally, some parts of the CCA are disapplied to "small agreements", for credit not exceeding £50, but Treasury feels that small BNPL agreements should not benefit from this.
What happens next?
Consultation closes on 6 January 2022. After Treasury has considered the responses (of which we expect there will be many), it will need to consider and consult on the legislation. And, when the legislation is put forward, it will be subject to the affirmative resolution procedure in Parliament.
Meanwhile, FCA will be consulting on the changes to its rules consequent on whatever Treasury decides.