Treasury has published the long-awaited consultation on draft legislation to bring those who offer Buy-Now-Pay-Later and similar products within the scope of financial regulation. It has published both draft legislation and a consultation paper which explains why it has taken certain policy decisions on what to include and what to leave outside the regulatory perimeter.
MPs have been clamouring for this draft legislation, with many trying to force the Government to commit to a timescale for its introduction by proposing new clauses in the Financial Services and Markets Bill. The Government had resisted all attempts to force its hand, saying it was imperative the legislation was framed properly to address the potential for consumer detriment. After its original announcement two years ago of its decision to regulate BNPL, it had several further questions about how regulation should look. Now, it has taken decisions and can proceed.
Distinction between merchants and third party lenders
The Government had been concerned that, although there was clearly a need to regulate the more recent types of product, the "true" BNPL products, which are usually taken out online with third party lenders and involve multiple low value agreements, these types of arrangement share their characteristics (and up to now the exemption in Article 60F(2) of the FSMA (Regulated Activities) Order 2001) with more traditional short term interest free credit products (STIFC), often taken out in-store and involving one agreement with either the store or a third party lender. The Government wanted to ensure it would regulate proportionately, focusing on products and services with the potential for consumer detriment.
Last year, it confirmed that regulation would include any STIFC that was provided by a third party lender, as well as BNPL. Additionally, it was minded to cover any agreement provided by merchants online or at a distance. It felt that taking out contracts in-person, in-store, provided sufficient friction as to be low risk, but that any distance contract had the potential to be higher risk. However, respondents to its consultation noted several types of merchant who would use the Article 60F(2) exemption at a distance, such as professional services providers and schools offering options to pay fees monthly, and merchants offering a way to pay for subscription services in such a way that the service stops if payments stop, such as gyms or season tickets. Having considered this the Government has decided to regulate only agreements offered by third party lenders, for fear of the burden of regulation for merchants selling online causing them to stop offering useful, low-risk products rather than become authorised. It will introduce an "anti-avoidance" measure to prevent third party lenders entering into agreements with merchants under which the lender effectively becomes the merchant once the loan is taken out which would otherwise enable the lender still to benefit from the exemption.
Newly regulated lending
The upshot is that lenders under borrower-lender-supplier agreements for fixed sum credit to individuals or relevant recipients of credit will need to be authorised where the agreement is:
- Interest free and repayable in 12 or fewer instalments within 12 months or less
- Provided by a person that is not the provider of goods or services to which the credit agreement relates
- Not exempt under any other exemption.
So the Article 60F(2) exemption will remain, but only for merchants offering credit on their own products and services.
The current "business use" exemption for regulated credit agreements will also be available for newly regulated agreements, but this applies only where the credit exceeds £25,000. The Government had been concerned about the risk of this meaning that trade credit for smaller businesses could fall within regulation, but thinks that now, because it will regulate third party loans only, businesses will still be able to defer payment for goods until they are paid using the Article 60F(2) exemption.
Additionally, the Government was concerned about whether the Article 60F(3) exemption predominantly used by charge cards, and exempting certain interest-free running account credit was at risk of being adapted and used inappropriately in the BNPL markets.This exemption, though, requires the full outstanding amount to be repaid in one payment, and on reflection the Government has decided the exemption is fine as it is and is not likely to be abused.
There will be a new exemption specifically to permit agreements that finance contracts of insurance where the insurer is not the lender (which would be exempt anyway), and an exemption to allow social landlords to operate under the current exemption when providing finance to their tenants for goods and services. Similarly, employee loan arrangements will be exempt, even if the loan is from a third party arranged by the employer.
The Government had always been wary of bringing yet more credit brokers who pose minimal consumer risk within the regulated activities perimeter – and, again, did not want to risk them ceasing to offer useful products. So, as originally proposed, merchants broking newly regulated agreements will not need to be authorised for credit broking except in the case of "domestic premises suppliers" - that is, doorstep sales.
Low value credit agreements benefit from an exemption to the CCA, but Treasury has confirmed there will be no "small agreements" exemption for BNPL, so BNPL products under £50 would be caught.
Some changes will be needed to the financial promotion regime to ensure that unauthorised merchants will not be able to issue financial promotions unless they have been approved by an authorised person. In practice, Treasury thinks that lenders will merely provide the merchant with pre-approved materials for use. Additionally, the Distance Marketing Regulations will be disapplied for unauthorised brokers in cases where relevant information will be disclosed by authorised lenders under FCA rules.
The consultation also confirms the disapplication of the CCA pre-contractual requirements, in favour of more proportionate FCA rules. But if some firms who are already authorised to lend under regulated credit agreements wish to use templates which are similar to those the CCA requires, they can do so, provided the information is clear, fair and not misleading and complies with the rules FCA will make.
Authorisation and FCA rules
Rome was not built in a day, and FCA will need time to finalise its rules and to consider applications for authorisation. So Treasury will introduce both a transitional period from the date it makes the legislative changes, and also a temporary permissions regime to ease the transition to FCA regulation. As with other newly regulated activities, the relevant firms will be deemed authorised and will have to comply with all relevant regulatory requirements, while FCA assesses their applications. Firms wanting to enter the TPR will have to have engaged in relevant activity before it becomes regulated, and must have registered and paid a fee for the TPR before that date. Firms that don't enter the TPR will not be able to enter into any newly regulated agreements, and firms that leave the TPR without becoming authorised will not be able to do so either. Agreements which were properly exempt at the time they were entered into will remain exempt, but where a firm in the TPR enters into an agreement and then leaves the TPR, it will retain its deemed authorisation solely to allow it to continue to be the lender under any relevant agreement.
Clearly the current consultation on the reform of the CCA will have a significant effect on the rules for BNPL firms to follow, and also Treasury expects FCA to work on a tailored application of its existing rules. For example, FCA will need to take an appropriate approach on how to apply creditworthiness rules, but Treasury thinks it is appropriate to apply the requirements of the Consumer Credit (Agreements) Regulations 2010 to newly regulated agreements.
Finally, Treasury has confirmed that the protections of s75 CCA should apply, with the current monetary thresholds (so, covering goods or services valued between £100 - £30,000), and that consumers should have access to FOS if they have a complaint about their lender.
Treasury will publish a consultation response in due course and says it will then lay legislation when Parliamentary time allows, "with the ambition" that this will be during 2023. So the change is still some way away, but for firms that will need to be authorised it is never too soon to start planning their application for FCA authorisation.