The UK government is consulting on its proposals to regulate BNPL, with comments due by 6 January 2022. In this article, payments and e-commerce expert Simon Deane-Johns explains the UK’s approach to regulating consumer credit, the basis on which BNPL is generally exempt at this time and how the government will bring BNPL within the regulatory scope.
Is BNPL currently regulated?
Unsecured consumer credit (a cash loan or other ‘financial accommodation’) is regulated under the Consumer Credit Act 1974 (CCA) and the Financial Services and Markets Act 2000 (FSMA), as is the activity of ‘credit broking’ (introducing consumers to lenders or other credit brokers).
Firms offering or investing in regulated credit agreements must be authorised by the FCA and must comply with relevant FCA rules and CCA obligations.
There is an ‘interest-free credit’ exemption that covers BNPL (as well as invoices that permit payment beyond the due date, for example, or agreements to pay in instalments) where:
- the agreement is a borrower-lender-supplier agreement for a fixed sum;
- no more than 12 payments are to be made by the borrower;
- payments are to be made within 12 months or earlier; and
- the credit is not conditional on interest or other charges (though charges might arise after the agreement is made, e.g. for missing payments).
BNPL products which take advantage of this exemption tend to either:
- split the cost of a purchase into several equal amounts, taken at regular intervals; or
- defer payment until a set time after the purchase is made and the item is not returned by the customer (‘try before you buy’), particularly for clothing.
Other models are also emerging, for example, where a third-party lender legally purchases the item and then resells it to the consumer, or where there is no pre-existing relationship between the merchant and the lender.
Rapid growth of BNPL
BNPL is used for the purchase of a growing range of products and services, and increasingly lower-value consumer goods, like fashion items. The recent Woolard review into the unsecured credit market found that:
- the value of BNPL from the main providers more than tripled in 2020 to £2.7bn, and is expected to grow rapidly by 2024 (this is similar to the growth in ‘pay day lending’ that also attracted further regulation);
- the number of merchants offering BNPL is in the low tens of thousands, with this number expected to grow very quickly;
- 11% of consumers (5 million individuals) said they had used BNPL during the COVID-19 pandemic.
The FCA has relatively limited evidence of how consumers use BNPL, but has enough experience to be concerned about consumer detriment where:
- it is promoted to consumers as a payment option, rather than credit;
- the features are misunderstood by consumers;
- there are no checks on creditworthiness;
- there are many low-value purchases with different payment dates; and
- there is the potential for high levels of debt.
The FCA has also seen inconsistent treatment of customers in financial difficulty and there is little visibility of BNPL debts to other lenders on an individual’s credit file.
Scope of BNPL regulation
The Woolard Review recommended that BNPL should be brought within the scope of FCA regulation, but not the sort of short-term interest-free credit arrangements used by healthcare services and sporting clubs.
Two regulatory options are being considered:
- only regulate interest-free credit agreements where a third-party lender is involved (meaning arrangements directly between merchant and consumer would remain exempt); or
- only regulate agreements where: there is a pre-existing, overarching relationship between the lender and consumer; the lender agrees to finance one or more transactions; and repayments go toward each transaction.
Like credit card issuers, BNPL lenders would be liable for the retailer’s breach of contract or misrepresentation relating to sales of items that cost between £100 and £30,000.
Retailers should not need authorisation for ‘credit broking’ unless selling to consumers during visits to their homes.
Advertising and promotions
Even unregulated BNPL agreements are already subject to certain marketing rules:
- UK Advertising Codes, monitored by the Advertising Standards Authority (ASA) and the Committee of Advertising Practice (CAP). The ASA has published guidance in December 2020 that BNPL providers must ensure that consumers know BNPL is credit, all the relevant information is appropriately available, and ads must not imply the BNPL is risk-free or suitable for everyone. The ASA has also made rulings on specific BNPL adverts.
- The Consumer Protection from Unfair Trading Regulations 2008, under which firms must provide consumers with the information necessary to make informed decisions and not omit or hide material information which the average consumer needs.
In addition, the government proposes that any ‘invitations or inducements’ to enter into a BNPL agreement must be issued or approved by an FCA-authorised firm to ensure that such communications are ‘clear, fair and not misleading’.
Form and content of documentation
Rather than mandate the form of pre-contract disclosures and BNPL agreements, the government will only require ‘adequate’ pre-contractual explanations that place the customer in a position to assess whether BNPL is adapted to their needs and financial situation. This means explaining:
- features that may make BNPL unsuitable for particular purposes;
- how much the customer will have to pay;
- features that may have a significant adverse effect that the customer is unlikely to foresee; and
- the main consequences of failing to pay, including any default charges or interest, an impaired credit rating and/or the debt being passed to a debt collection agency.
Credit checks would be required for new BNPL customers, when adding new BNPL agreements, or increasing credit limits. This means assessing both the credit risk to the lender (that the customer will not pay the credit) and whether the customer can afford the payments without a detrimental impact on their financial situation (affordability).
Customers in financial difficulty
The government wants consistent treatment of BNPL customers in financial difficulty.
FCA rules require regulated firms to treat such customers fairly, with forbearance and due consideration, taking into account their individual circumstances.
Debt collection agencies must be authorised and regulated by the FCA.
Financial Ombudsman Service (FOS) and consumer redress
The government proposes to allow BNPL consumers to complain free of charge to FOS to help resolve their disputes with regulated providers without going to court.
No doubt these proposals are intended to cool the BNPL market to some degree, and they will likely be welcomed by BNPL lenders and merchants with robust compliance procedures. How this will impact the rapidly growing market remains to be seen.