On 20 June 2022, the UK Treasury published its response to its consultation (launched in October 2021) with a view to bringing within the regulatory perimeter interest-free Buy-Now Pay-Later (BNPL) credit agreements (the Consultation Response). In short, the government intends to regulate both BNPL and other short-term interest-free credit (STIFC) agreements provided by third party lenders (and potentially STIFC provided directly by merchants where offered online or at a distance). However, there is recognition that regulation should be applied proportionately and much of the paper discusses how the existing regime should be tailored to BNPL and STIFC products.
In terms of next steps, we can expect to see a second consultation, which will include the proposed draft text of the legislation, around the end of the year, with secondary legislation expected by mid-2023 and an FCA consultation on its approach also in mid-2023.
For a more fulsome overview, read on.
Why was the UK Treasury consulting?
The UK government announced its intention to regulate BNPL products in February 2021, following a recommendation made in the Woolard Review. Many of the themes raised in the Woolard Review continue to be themes running through the consultation response document including affordability (i.e., lack of requirements for BNPL providers to undertake creditworthiness assessments, ease of taking out multiple agreements from different lenders), consumer understanding of the products and risks involved, advertising and promotions, lack of protections that apply to regulated products such as section 75 of the Consumer Credit Act 1974 (CCA) and the level of fees involved in default.
What is in the Consultation Response?
The Consultation Response does not provide any draft legislation, so it is difficult to understand exactly how the proposals will apply. However, the Consultation Response does provide an overview of the high-level points. In particular:
- Both BNPL and STIFC provided by third party lenders will be regulated (note, the initial 2021 consultation only proposed the regulation of the former). However, merchants offering agreements which are brought into regulation as a payment option will be exempt from credit broking regulation. The government is also “minded to” regulate STIFC provided directly by merchants where it is offered online or at a distance (but not in store). However, it is seeking further comments from stakeholders by 1 August 2022 before making a decision.
- Exemptions will continue to apply to specific agreements where there is limited risk of potential consumer detriment and where regulation would otherwise adversely impact day-to-day business activities. Examples include invoicing, interest-free agreements which finance contracts of insurance, charge cards, trade credit and employer/employee lending. These types of agreement currently fall within the same exemptions as that used by many BNPL providers, so the drafting of the legislation will be key in order to ensure that the law matches the policy intent.
- The application of certain parts of the CCA and relevant rules will be tailored to the products. The UK Government has committed to introducing balanced and proportionate regulation of BNPL. Taking that overarching sentiment, the Consultation Response contemplates, for example: (a) the disapplication of certain rules around the provision of pre-contractual information; and (b) that the form and content of BNPL and STIFC agreements will be subject to a tailored approach given the lower risk involved in BNPL and STIFC agreements and how they tend to be used (the detail will be set out in secondary legislation). We note that, in any event, the UK Treasury has committed to reform the entire CCA to update it for modern lending markets and that a consultation on CCA reforms is expected to be published by the end of this year.
- But other rules will apply (almost) as they do today. Although some of the requirements will apply in a lighter-touch way, others will apply in full in order to ensure that consumers are protected appropriately. The Consultation Response identifies that the rules around the following subjects will apply (albeit with some moderations where appropriate): creditworthiness assessments, financial promotions and jurisdiction of the Financial Ombudsman Service (FOS) (on each of which, see below), arrears, defaults and forbearance and the well-known Section 75 CCA protection.
- Lenders will need to undertake creditworthiness assessments in line with existing FCA rules. The FCA will consult on its proposals for rules on arrears, default and forbearance for BNPL and STIFC agreements. The government also takes the view that 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.
- Advertising and promotion of BNPL and STIFC agreements will fall within the financial promotions regime and will apply to merchants offering BNPL and STIFC products as payment options. In practice, this means that merchants will be required to obtain approval for promotions of BNPL products from an authorised person (which could, but does not have to, be their BNPL lender partner). The FCA will consult on proposals for rules on financial promotions in due course.
- The Financial Ombudsman Service (FOS) will have jurisdiction to deal with complaints concerning BNPL and STIFC. The further expansion of the FOS’s jurisdiction is likely to reinvigorate the debate about the FOS’s role and the perceived inconsistency of its decisions with the FCA’s interpretation of rules - this is likely to be brought further into focus given the upcoming changes to the FCA’s rules.
What are the key takeaways?
Not only does the Consultation Response not provide any draft legislation, but much remains to be determined before the full scope and impact of the proposals becomes clear (for example, the revised drafting of the relevant exemptions, the application of the CCA to BNPL and STIFC agreements, how the financial promotions rules will apply, and whether STIFC provided by merchants online will be regulated). While the government has indicated that there will be a transitional period to ensure firms are given sufficient time to adjust to the contemplated changes, it points to the work already being done by BNPL lenders to proactively adapt, suggesting any transitional period may not be too generous.
More broadly, the proposal to regulate BNPL and STIFC continues the theme of legislative and regulatory reform aimed at protecting consumers and comes at a time of economic uncertainty and a cost of living crisis. The FCA has also focused on increasing competition which, it says, improves outcomes for consumers. However, increased regulation comes with increased cost and any increased regulatory burden may favour more established institutions to the detriment of competing (and currently unregulated) BNPL lenders.
For a short summary of developments around the world, the Freshfields in Fintech podcast on BNPL may be of interest.
The government has been clear in its intention to regulate BNPL, given The Woolard Review and research from consumer groups have demonstrated the need for intervention to prevent consumer detriment from crystallising.