On 17 October 2024, HM Treasury launched its third consultation on the proposed regulation of Buy-Now, Pay-Later (BNPL) credit agreements, alongside the draft statutory instrument which will bring this regulation into force. The proposed legislation will bring third-party lenders providing deferred payment credit (DPC) agreements under the supervision of the FCA.
This is the culmination of two previous consultations (launched in October 2021 and February 2023) by HM Treasury on the regulation of BNPL credit agreements and other short-term interest-free credit following the Woolard Review in February 2021. For more information on those consultations, see our blog post from June 2022 here and February 2023 here.
In an accompanying press release, the Government has emphasised the ‘urgency’ of the reforms by setting a consultation period of only six weeks, and stating it intends to bring final legislation “as soon as parliamentary time allows”. Its aim is to “give shoppers access to the key protections provided by other forms of credit while providing the sector with the certainty it needs to innovate and grow.”
The consultation largely confirms the approach proposed by the previous Government but provides useful clarification on the application or disapplication of provisions in the Consumer Credit Act 1974 (CCA). This reflects feedback (particularly from BNPL firms) that applying certain CCA requirements would be overly burdensome without material benefit to consumers.
Background
Currently, BNPL products – structured as interest-free, short-term deferred payment credit – are largely exempt from regulation under the CCA and Financial Services and Markets Act 2000 (FSMA). This was informed by the view that low-risk credit agreements, in particular informal arrangements offered by small and medium enterprises (SMEs) for whom provision of financial services is not a primary business activity, should not be regulated.
However, given the widespread use of BNPL – 14 million consumers used it in the six months to January 2023 – as well as the perceived vulnerability of people using BNPL, concerns have been raised about consumer detriment, particularly regarding lack of affordability assessments, transparency, and insufficient consumer redress mechanisms. These risks were outlined in the Woolard Review in 2021, and concerns have been raised more recently by consumer rights campaigners. In this regard, the FCA has acknowledged in a press release that “BNPL can provide benefits for consumers by giving them more payment options and support merchants in selling their goods and services. But as with other credit products, there are also risks and the potential for harm.”
Scope of proposed regulation
The draft statutory instrument endorses the pragmatic approach adopted in previous consultations which seeks to ensure only agreements considered as “presenting a significant risk of potential consumer detriment” are captured by the regulation.
The proposed legislation provides for the FCA to regulate the providers of loans which are interest free and repayable in 12 or fewer instalments within 12 months or less. However, the consultation confirms that this is limited to agreements offered by third-party lenders, meaning that agreements provided directly by merchants will continue to be exempt from regulation. This is subject to an anti-avoidance mechanism designed to prevent third-party BNPL lenders avoiding regulation by structuring agreements so that they technically become the merchant in the transaction they are financing, having purchased the goods from the original supplier. This aims to protect customers from using a product they mistakenly believe to be regulated.
The consultation acknowledges concerns expressed by some stakeholders that large tech or e-commerce platforms could offer their own BNPL-type agreements at scale, rather than through a third-party lender, which could lead to these providers having a competitive advantage over regulated lenders. The consultation notes that it has not seen evidence of merchants offering these agreements at a scale close to that of third-party lenders, but it will monitor developments and will act if there is evidence of significant growth in the market or significant potential for harm to consumers.
Exemptions
The consultation confirms the carve-outs identified in the February 2023 draft legislation for certain types of lending it considers to be lower risk. These include agreements financing contracts of insurance, registered social landlords, and employer/employee lending. In response to feedback, the Government has also expanded the exemption for employer lending to encompass entities in the employer’s wider group.
What does the proposed regulatory framework include?
- FCA authorisation and supervisory powers: In-scope BNPL firms will be required to obtain FCA authorisation, bringing them within the FCA’s supervisory and enforcement regime. This includes compliance with creditworthiness and affordability assessments to ensure that consumers can only obtain credit on reasonable terms and can afford repayments.
- Temporary permissions regime (TPR): The FCA will establish a TPR to allow BNPL providers to continue to operate their lending until their application for full authorisation has been processed. The regime gives flexibility to firms to continue to operate for up to two years after the new regime comes into effect.
- Enhanced consumer protections: Regulated BNPL agreements will be subject to key provisions of the CCA, including Section 75, which imposes joint and several liability on creditors for breaches of contract by suppliers. The FCA will consult on applying complaints handling to BNPL firms and enabling their customers to refer complaints to the Financial Ombudsman Service (FOS).
- Financial promotions: Promotions and advertising of regulated BNPL agreements will fall within the financial promotions regime. This means that unauthorised merchants offering BNPL payment options will need their promotions approved by an authorised person, unless an exemption applies. In practice, authorised BNPL providers may prefer to issue their own financial promotions for use by merchants with whom they partner.
- Information requirements: Responses to the previous consultation expressed concerns with applying the CCA’s prescriptive provisions regarding pre-contractual disclosure and ongoing information requirements. The latest consultation confirms that these will be disapplied, and instead an FCA rules-based regime will be developed, in line with the Consumer Duty. This represents a pragmatic approach, with the consultation focusing on the practical operation of these arrangements – including that they are often taken out on a mobile device (with CCA requirements designed for paper / larger screens), are shorter term and interest-free (meaning certain risks the CCA seeks to avoid are less relevant), and that customers may be vulnerable, meaning providing additional complex information would not maximise consumer understanding.
- Other CCA provisions: The proposed legislation also disapplies other CCA provisions that the Government recognises are unsuitable for BNPL agreements, including rules concerning default notices, termination and arrears. Instead, the FCA will be able to consider how its existing rules should apply to BNPL agreements and supplement them with further provisions ‘if appropriate and necessary’. However, consumers will still be able to apply to a court for ‘Time Orders’ to provide more time for payment under an agreement where the consumer is able to repay the debt within a reasonable period. In light of feedback regarding sanctions provisions in the CCA, the Government has concluded that they can be disapplied for BNPL agreements without a significant impact on consumer protection.
- Small agreements: Given many BNPL agreements are for below £50, to ensure these agreements are regulated, the provisions on ‘small agreements’ in section 17 of the CCA are disapplied, meaning that all agreements in scope, regardless of value, will fall under the new regime.
- Credit broking: merchants who offer regulated BNPL agreements as a payment option will not be considered ‘credit brokers,’ as this would impose significant costs on retailers. However, domestic premises suppliers seeking to broker regulated BNPL agreements will be regulated.
- Distance Marketing: In light of feedback, the Government has clarified that retailers do not need to actively monitor BNPL firms’ compliance with the FCA rules on distance marketing in order to benefit from the disapplication of information provision requirements in accordance with the Financial Services (Distance Marketing) Regulations 2004.
Next steps and takeaways
The accelerated timeline prescribed in the latest consultation indicates that this is a priority for the Government – responses are due by 29 November 2024, the Government intends to lay the final statutory instrument before Parliament in early 2025, and it proposes to set a ‘Regulation Day’ one year after the statutory instrument is made, when regulation will come into force.
While the exact requirements remain to be determined (with the FCA consulting on its rules in due course), the approach seems to take on board feedback and apply a pragmatic approach that reflects the nature of these agreements and the manner in which they operate.
The Government says it remains committed to reforming the CCA and intends to set out detailed reform proposals in a separate consultation ‘in due course’. HM Treasury will consider the future of the CCA’s sanctions as part of this wider work on CCA reform.
