HM Treasury has now (20 June 2022) published its response document to its consultation paper on regulating interest-free buy-now-pay-later (“BNPL”) credit products.
By way of background, the government announced last year its intention to bring BNPL credit within the regulatory perimeter. Currently, many BNPL credit products fall within an exemption for short term interest-free credit products – which means that providers of these products do not need FCA authorisation, nor do the FCA’s regulatory rules apply. Furthermore, most of the provisions of the Consumer Credit Act 1974 (“CCA”) do not currently apply to BNPL products that rely on the exemption.
The response document contains the following key points:
- Extension of the regulatory perimeter to include BNPL and STIFC products. The government had intended only to extend the regulatory perimeter to include BNPL agreements (e.g., agreements which are typically taken out online with consumers having an overarching relationship with a third-party-lender). However, having taken into account responses to the consultation, the government also now intend to regulate other short-term interest-free agreements (“STIFC”) (e.g., credit products frequently offered in-store, with consumers taking out a single, higher-value discrete agreement with a credit provider). This is despite the government acknowledging that STIFC credit has operated for many years without raising significant concern. The response states that regulation should cover STIFC products when they are provided by third party lenders, and the government is also minded to extend the scope of regulations to capture STIFC products offered directly by merchants either online or at a distance. HM Treasury have requested comments on the proposal to include merchant-offered STIFC products by 1 August 2022. It states that comments are particularly welcome in relation to sectors in which responses to date indicate that such credit may be offered such as: dentistry, healthcare, sports clubs, vehicle repair and potentially SME retailers.
- Exemptions for certain short-term credit to remain. HM Treasury state that whilst they intend to bring into scope BNPL and STIFC credit, they do not want to remove exemptions for other types of short-term credit products, including: invoicing, interest-free agreements which finance contracts of insurance, charge cards, trade credit and employer/employee lending.
- Exemption for merchants brokering BNPL / STIFC credit. The government intends to exempt merchants offering BNPL / STIFC agreements which are brought into regulation as a payment option from credit brokering regulation. This will be extremely welcomed by merchants who partner with third party lenders to provide alternative payment options to their customers. The government took the view that there is minimal risk of merchants pushing consumers into unsuitable credit products – as merchants do not typically receive a commission for brokering these types of products.
- Financial promotion regime to be extended. The government intends to amend the financial promotions regime so that all promotions of BNPL agreements fall within the financial promotions regime (we note that many promotions are already caught). This means that merchants (who are not themselves authorised) will need to obtain approval for promotions of BNPL / STIFC agreements from an authorised person (which could be the lending partner).
- FCA rules to set out pre-contractual information that will apply. CCA rules on form and content of agreements will apply. The BNPL and STIFC credit products brought within scope will not be subject to the pre-contractual information requirements contained in the CCA, however, they will be subject to pre-contractual information requirements to be implemented by the FCA. The provisions contained in the CCA on the form and content of agreements will apply to BNPL and STIFC credit products, however, importantly, the government intends to tailor these requirements (through secondary legislation) to make them more proportionate taking into account the lower risk involved in BNPL credit and how they tend to be used.
- CCA improper execution provisions will apply. The government intend to apply the improper execution provisions of the CCA in the same way as it does to other regulated credit agreements. This would mean that a BNPL / STIFC agreement would become unenforceable without a court order if the agreement was not in the prescribed form, contained the prescribed content, and was signed in the prescribed manner.
- Creditworthiness rules will apply. BNPL and STIFC products will be subject to the FCA’s current rules on creditworthiness assessments and it will be for the FCA to decide whether the rules need to be tailored.
- CCA’s stringent rules on arrears and default will be applied. The CCA contains requirements (including certain notices that must be sent to the borrower) in the event that the borrower goes into arrears/defaults on the loan. The government intends to apply these requirements to BNPL and STIFC products but acknowledges that some of the rules may need to be tailored given the short term nature of the products.
- Section 75 protection will attach to BNPL / STIFC agreements. As a general rule, section 75 of the CCA will apply to BNPL and STIFC products. Broadly, section 75 provides that if the borrower has a valid claim against the supplier in respect of misrepresentation or breach of contract, the borrower has a like claim against the lender, who is jointly and severally liable with the supplier. For example, prima facile, if a BNPL or STIFC product was used to purchase a television from a shop (and the credit was provided by a third party) and the television was faulty – then the purchaser would also have a claim against the lender (which might be helpful, for example, if the shop had gone insolvent).
- Small agreement provisions to be disapplied. The CCA disapplies certain provisions to small agreements of less than £50. The government intends to change the legislation so that BNPL / STIFC agreements will not enjoy this ‘exemption’ even when the BNPL / STIFC agreement is for an amount less than £50.
- FOS jurisdiction to be extended. The government intends to extend the Financial Ombudsman Service jurisdiction to include the BNPL and STIFC contract brought into scope of regulation.
There is nothing particularly surprising or controversial in the HMT response, however, in our view, it will be critical that the regime (including the FCA rules) is kept proportionate and does not materially hinder merchants from offering instalment options to consumers.
Whilst the proposal to expand the regulatory perimeter is broadly welcomed, if the rules (which have not yet been published or consulted on) have the effect of making the customer journey long and onerous, this would be wrong and would not be proportionate to the risks of BNPL credit. When drafting the secondary legislation and the regulatory rules, consideration should be given to online business models and the drafters should ensure that the rules are appropriate for online e-commerce business models and electronic communication. It is also welcomed that the government is committed to reform of the CCA, as it unnecessarily complex and outdated.
Furthermore, especially given how long the FCA is currently taking to process authorisation applications, there will need for a suitably long transition window to allow firms brought into the regulatory perimeter time to apply for FCA authorisation.
Importantly, firms already authorised and firms that will become authorised under the new regime, will need to pay particular attention to the financial promotion reforms, as BNPL / STIFC credit firms will need to have the ability to approve the financial promotions of merchants.
HM Treasury states that it will publish and consult on draft legislation by the end of 2022 and intends to lay secondary legislation by mid-2023. The FCA will then consult on its regulatory rules for the new regime.
The government also noted within the response that the current regulatory framework for consumer credit is built around a dated model of regulation established by the CCA. The paper stated that the government still intends to publish its first consultation on reforms to the CCA later this year.