On 14 February 2023 the UK Treasury published its second consultation on the proposed regulation of Buy-Now-Pay-Later (BNPL) credit agreements, as well as the draft statutory instrument which will bring this regulation into force. This provides helpful clarification on the scope of the Government’s proposed regulatory regime.
As drafted, the legislation would mean that third party lenders providing BNPL credit agreements and other short-term interest-free credit (STIFC) would be regulated by the FCA (New Regulated Agreements). It is the latest step in the Government’s plan to regulate BNPL products, announced in February 2021, and follows on from the response to its initial consultation published in June 2022 (see previous blog post here).
Responses to this consultation are due by 11 April 2023. After publishing a summary of responses, the Government intends to publish final draft legislation, all of which is due to take place in 2023. Once the Government has published its final draft legislation the FCA will publish a consultation paper on its proposed rules for regulating firms providing these agreements.
Which products will become regulated?
Under the proposed legislation, the FCA will regulate the providers of loans which:
- are interest free, repayable in 12 or fewer instalments, within 12 months or less;
- have the credit provided by a third-party lender (i.e. not the person providing the goods/services which the agreement finances); and
- do not fall within one of a limited number of exemptions (see below).
Following feedback, the Government decided not to regulate agreements concluded directly with merchants. However, the draft legislation includes an anti-avoidance provision designed to capture agreements that are provided by a third-party lender to finance purchases from a merchant, but where the merchant has an arrangement with the third-party lender under which the merchant agrees to sell the goods to the lender at the point when the agreement is taken out (i.e., where the third party lender is deemed to be the merchant at the point of sale). This will protect customers from mistakenly believing they are using a regulated product.
The legislation carves out certain types of lending which are considered beneficial to consumers, or where regulation would adversely impact day-to-day business activities (for example insurance contracts, landlord/tenant credit and employer/employee benefit schemes).
The draft legislation aims to ensure the scope of regulation is proportionate, including:
- ensuring that merchants who offer their customers the ability to pay via a Newly Regulated Agreement will not be considered ‘credit brokers’ and therefore will not need to be FCA-authorised;
- confirming the Consumer Credit Act’s (CCA) prescriptive pre-contractual disclosure provisions will be disapplied and that an FCA rules-based regime for pre-contractual disclosure would be more proportionate (on which the FCA will consult in due course). Importantly, the sanction of unenforceability without a court order in the CCA will not apply, and instead the FCA’s existing enforcement toolkit will be used; and
- disapplying the Distance Marketing Regulations 2004 for unauthorised merchants where information is disclosed by authorised lenders in accordance with the FCA’s rules on distance marketing for authorised persons.
This emphasis on proportionality reflects the fact that the Government considers Newly Regulated Agreements to be lower risk than other types of credit. However, the existing “small agreements” provisions of the CCA, which takes many agreements below £50 out of the CCA regime, will be disapplied for Newly Regulated Agreements – that is, all agreement in scope, regardless of their value, will fall under the new regime. This will ensure consistent consumer protection across all BNPL agreements, which is considered necessary as many BNPL agreements are for amounts below £50.
Impact of regulation
- Firms offering Newly Regulated Agreements to consumers will need to be authorised, and the FCA will be entitled to exercise its supervisory and enforcement powers against such firms.
- Initially, a ‘temporary permissions regime’ will allow firms to be treated as authorised from the date the legislation comes into force, until the formal authorisation process is completed.
- The legislation will be forward-looking only, meaning existing BNPL/STIFC agreements will remain unregulated for their duration.
- All advertising and promotions of Newly Regulated Agreements will fall within the financial promotions regime – including in relation to unauthorised merchants offering BNPL as a payment option (even when through an authorised lender). In practice, the government anticipates that merchants will not have all their financial promotions individually approved by an authorised person, but that third-party providers of such products will provide pre-approved materials to merchants.
- Important details of this regime, such as tailored rules on creditworthiness assessments and credit reporting rules, have been left to the FCA. The Newly Regulated Agreements will also be in scope for some existing legislation, for example regarding the form and content of the agreements, the CCA provisions on the treatment of customers in financial difficulty, and the protection offered by s.75 CCA relating to point of sale loans (although the monetary thresholds will not be amended).
- Customers will be entitled to complain and seek redress via the Financial Services Ombudsman, as well as being able to bring proceedings under s.138d of FSMA where a breach of FCA rules has caused them harm.
Key takeaways
- This continues the theme of legislative and regulatory reform aimed at protecting consumers, particularly those considered to be most vulnerable.
- The Government is critical of the ‘dated’ CCA model of regulation, and is keen to adopt a more proportionate, practical approach. HMT’s consultation on a wider reform of the CCA regime is ongoing.
- The Government appears keen to adopt a pragmatic approach aimed at minimising harm by taking proportionate measures, while preserving the benefits of certain BNPL-type agreements.