Following the Woolard Review in February 2021, you may remember that HM Treasury published a consultation in October 2021 which closed on 6 January 2022. It set out proposals to extend regulation to unregulated Buy Now Pay Later (BNPL) products. The consultation sought views on the scope of regulation in relation to the activities which should be regulated, and the regulatory controls applicable to these types of products. It also considered whether other forms of short-term interest free credit (STIFC) should be treated in the same way as BNPL.
For helpful context, when HM Treasury refer to BNPL they mean products that are generally taken out online by consumers who enter into an overarching arrangement with a third party-lender, under which numerous low value agreements are made. By way of distinction, STIFC includes products usually offered in-store to enable customers to pay for a single high value item who take out the one agreement for a higher value with either a third-party lender or the retailer/supplier themselves.
Where are we now?
On Monday 20 June 2022, HM Treasury responded to this consultation and confirmed the scope of regulation for BNPL products and STIFC that is provided by third-party lenders. Further feedback is now being sought as to whether or not the scope is extended to BNPL and STIFC provided by merchants. The deadline for stakeholders to provide further information is Monday 1 August.
What will remain unregulated?
As well as confirming the scope of regulation for BNPL and STIFC products, HM Treasury has also provided clarification on arrangements that will remain exempt from regulation. These include:
- invoicing finance;
- interest free agreements which finance contracts of insurance;
- charge cards;
- trade credit; and
- employer/employee lending.
Proposed regulatory controls
The Woolard Review and the consultation established that, while there is evidence of possible consumer detriment, the risk for consumers is lower when compared to interest-bearing credit products. Therefore, it is HM Treasury's view that the regulatory controls applied to agreements falling within scope of regulation are proportionate to the risk level of that product and the need to provide effective consumer protection.
HM Treasury put forward certain proposals in its consultation and has responded accordingly:
- Credit broking – it was proposed that merchants who offer BNPL (from a third-party lender) as a payment option should be exempt from regulation and do not need to apply for authorisation as credit brokers.
Response: The intention is to exempt merchants as per the consultation proposal with certain exceptions to this in relation to domestic premises suppliers. The government has considered consumer detriment risks that might arise from these merchants and believes these risks can be mitigated by existing protections and other proposed new controls e.g. financial promotions.
- Advertising and promotions – apply the financial promotions regime to the advertising and promotions of BNPL.
Response: The government maintains that the financial promotions regime should apply to merchants offering BNPL and STIFC products. Legislation will need to be amended to bring promotions relating to BNPL and STIFC within scope of the financial promotions regime.
- Pre-contractual information – the consultation proposed that the FCA's rules on pre-contract disclosure and adequate explanations would be sufficient for BNPL agreements rather than applying the full suite of pre-contractual requirements specified under the Consumer Credit Act 1974 (CCA).
Response: The view remains that the CCA pre-contractual requirements should be disapplied and that application of the FCA rules is the proportionate approach.
- Form and content of the credit agreement – it was proposed that bespoke legislation be drafted and implemented to set out the requirements for the form and content of BNPL agreements as the CCA requirements might not be appropriate.
Response: The government considers it appropriate for the form and content requirements of the BNPL agreement to be prescribed in legislation secondary to the CCA rather than taking an FCA rules-based approach. The extent of the requirements in this bespoke legislation will be carefully considered and will require further engagement from stakeholders.
- Improper Execution – apply the improper execution provisions under section 61 of the CCA to BNPL agreements.
Response: The maintained view is that it is proportionate to apply the CCA improper execution provisions to BNPL and STIFC agreements that will be within scope of regulation.
- Creditworthiness and credit files – the consultation sought views as to whether or not there should be specific creditworthiness requirements for BNPL agreements, and also whether they should be reported on credit files.
Response: It has been considered proportionate by the government to apply the FCA creditworthiness rules to in scope agreements, but it has given the FCA the decision-making powers to decide if the rules are to be applied as currently drafted or modified for BNPL and STIFC agreements. As with all other regulated credit agreements, there is no particular regulatory requirement to report information to credit reference agencies. The view held is that there should however, be clear, consistent and timely credit reporting from a responsible lending perspective. Credit reference agencies are being engaged to develop how they approach BNPL in a reporting context.
- Arrears, default and forbearance – the government set out its view that some of the requirements under the FCA arrears and default rules should apply to BNPL agreements. It also thought it was proportionate to apply the CCA post-contractual information provisions on arrears and default in order to address the lack of consistent treatment of customers who are in financial difficulty.
Response: It is held that the FCA rules and CCA provisions on arrears and default are vital for customer protection. It is therefore the intention that the CCA provisions on arrears and default, will apply to BNPL and STIFC agreements, although it is recognised that these provisions may need to be adapted given that these types of agreements are generally short-term in duration. This will be considered, and any tailored requirements will be included in the draft regulations.
- Section 75 CCA – section 75 is a strong consumer protection measure already known and employed by consumers and therefore it should apply as with other regulated credit agreements.
Response: The government feels very strongly that section 75 should not be disapplied and recognises that the monetary threshold of section 75 will mean that certain BNPL transactions fall outside of scope. However, this is the situation across other regulated credit agreements so there will be consistency in applying this.
- Small agreements – It was suggested that the small agreement provisions in the CCA be disapplied so that BNPL agreements which have a value of less than £50 do not fall outside of scope of all the CCA requirements.
Response: A consistent approach to consumer protection is key and to ensure that this occurs, the small agreement provisions set down in the CCA will be disapplied for BNPL and STIFC agreements.
- Financial Ombudsman Service ('FOS') jurisdiction – The view was that FOS jurisdiction should be extended to apply to BNPL agreements.
Response: As set out in the consultation, the view remains that consumers should have access to the FOS and therefore the jurisdiction of FOS will apply to BNPL and STIFC agreements. The FOS case fee will be considered in further detail as the current case fee of £750 may be disproportional high when compared with the average BNPL transaction amount of £50-100.
- The government now want more information to help them form the view as to whether the scope of regulation should be extended to encompass STIFC products provided by merchants. The window to respond is open until Monday 1 August. Views are welcome from everyone but in particular those from certain sectors including, dentistry, healthcare, sport clubs and SME retailers. Once these views have been considered the government will decide whether to bring STIFC products provided by merchants within the scope of regulation.
- Towards the end of the year, HM Treasury aims to publish and consult on draft legislation.
- By mid-2023 following the second consultation, the aim is to lay secondary legislation before Parliament. The FCA at this point, will be able to consult on its approach and the extended regime, after having worked closely with the government.
This is one to watch closely.