On February 14, 2023, the UK government published a Consultation (the Consultation) on its plans to regulate buy-now-pay-later (BNPL) credit agreements. The Consultation is accompanied by draft legislation that will bring BNPL agreements within the Financial Conduct Authority’s (FCA) authorization regime for financial services. Firms lending under in-scope agreements will need to be authorized and will be subject to various statutory and regulatory obligations including creditworthiness assessments, the provision of precontractual disclosures, requirements on the form and content of credit agreements, and postcontractual information in the event of arrears, default, and forbearance.
Scope of Regulation
Under government proposals, BNPL agreements will be regulated if they
- are for fixed-sum credit to individuals or “relevant recipients of credit”1
- are interest-free, repayable in 12 or fewer instalments within 12 months or less
- are provided by third-party lenders (i.e., a person who is not the provider of goods or services that the credit agreement finances)
- do not fall within one of the exemptions (see Regulatory Exemptions section below)
Given that the new regulatory regime will be limited to third-party lenders, and will not extend to merchants financing the supply of their own goods or services, as an antiavoidance measure, the government also proposes to extend the regulatory net to arrangements whereby the third-party BNPL lender purchases the goods from the original seller at the point of financing them with the customer. This is to mitigate the risk of consumers mistakenly believing they are using a regulated product.
The government has determined that the following credit arrangements do not pose a significant risk of consumer detriment and will, therefore, not require authorization:
- trade credit, where a small business can defer payment for goods or services until its own customers have paid
- agreements to finance insurance premiums, including where a third party, such as a broker, is involved in the transaction
- employee credit agreements resulting from an arrangement between their employer and the lender or supplier
- agreements offered by a registered social landlord
The proposals also include an exemption for merchants from the regulated activity of credit broking. The exemption will cover credit broking in circumstances where merchants offer BNPL credit from a third-party lender as a payment option. However, domestic premises merchants (i.e., merchants that offer to sell goods or services when visiting customers in their home) will require FCA authorization if they offer customers the choice of paying on credit provided by a third-party BNPL lender.
Other Regulatory Controls
The Consultation also sets out the UK government’s policy position on various other regulatory controls on BNPL agreements.
There is a concern that advertisements for BNPL products are not always “fair, clear and not misleading.” While the financial promotions regime already applies to some scenarios, the government intends to extend the scope of the regime to cover unauthorized merchants offering BNPL as a payment option. This will require promotions of newly regulated BNPL agreements to be approved by an FCA-authorized firm. This may result in additional operational burdens for unauthorised merchants, though it is expected that in practice, merchants will likely receive preapproved materials from lending partners as opposed to seeking approval for each individual financial promotion.
Creditworthiness Assessments and Credit Files
The government considers that proportionate regulation of BNPL products should include a tailored application of the FCA’s current rules on creditworthiness assessments and that there should be clear, consistent, and timely reporting of newly regulated agreements across the three main credit reference agencies. It remains to be seen how the FCA will tailor the current rules on credit assessments for the BNPL regulated market.
The prescriptive and inflexible requirements of the Consumer Credit Act 1974 (CCA) regarding the provision of precontractual information to customers will not apply to newly regulated BNPL agreements. The UK government considers that these requirements would not be proportionate to the risks arising from BNPL agreements. BNPL firms will instead be required to apply FCA-made rules on pre-contractual disclosures.
Distance Marketing Regulations
The Financial Services (Distance Marketing) Regulations 2004 (DMRs) broadly capture all financial services (including consumer credit agreements) provided under a distance contract between a supplier and a consumer, including unregulated agreements. Like the CCA, the DMRs also contain requirements for the provision of precontractual information that extend to intermediaries such as credit brokers.
As the government intends to exempt merchants from credit broking regulation in relation to newly regulated agreements, the DMRs would (without amendment) result in duplicate requirements for the provision of precontractual information by (i) the unauthorized merchants that would need to disclose information under the DMRs and (ii) the authorized lenders under newly regulated agreements that would be required to provide information under FCA rules.
To resolve this issue, the government has included a provision in the draft legislation that will disapply the DMRs for unauthorized brokers (i.e., merchants in this example) where information is disclosed by authorized lenders in accordance with the FCA’s rules on distance marketing for authorized persons.
Content of BNPL Agreements
The government proposes that the current requirements under the Consumer Credit (Agreements) Regulations 2010 on the form and content of regulated consumer credit agreements will apply to BNPL agreements so as to enable consumers to make effective decisions about their BNPL products. Consequently, the provisions in the CCA that render incorrectly executed consumer credit agreements unenforceable without a court order will apply to BNPL agreements.
Section 75 - Consumer Protection
Section 75 of the CCA allows a borrower to raise a claim against its credit provider for any breach of contract or misrepresentation by a supplier if it paid for some (or all) of the product by credit card or with a regulated point-of-sale loan. The government remains committed to extending this protection to BNPL agreements. This could significantly affect BNPL lenders’ existing business models and create a major new source of potential liability.
As is the case under the existing CCA regime, this protection will not apply to claims relating to a single item with a cash price of less than £100 or more than £30,000.
Arrears, Default, and Forbearance
In response to its initial consultation on the regulation of BNPL2 (the Consultation Response) published on June 20, 2022, the government proposed that the CCA requirements on the treatment of consumers in financial difficulty would apply to newly regulated agreements. This is despite comments from stakeholders that the current requirements on postcontractual information (and, in particular, the timing for such disclosures) may need tailoring for BNP agreements given their sometimes very short-term nature.
In the Consultation, the government states that it will not amend the timing triggers for these disclosures but notes that it may consider this further as part of its broader reforms to the CCA.3
Financial Ombudsman Service
Consumers will be able to bring complaints concerning the conduct of BNPL lenders to the Financial Ombudsman Service (FOS). Concerns have been raised about the potential disproportionality of the FOS case fee when compared to the typical value of BNPL agreements. The government continues to engage with FOS on its approach to BNPL.
Transitional Period to FCA Regulation
The government and the FCA intend to introduce a temporary permissions regime (TPR). Firms in the TPR will be deemed authorized by the FCA in relation to newly regulated BNPL agreements and will be able to carry on the following activities, which will be brought into regulation while they seek full authorization:
- entering into a regulated credit agreement as a lender
- exercising, or having the right to exercise, the lender’s rights and duties under a regulated credit agreement
- credit broking (for domestic premises suppliers that offer newly regulated agreements)
(together, the “Regulated BNPL Activities”)
Eligibility for the TPR
Firms that are currently unauthorized and wish to undertake regulated BNPL activities will need to register with the FCA for entry into the TPR before the day on which regulation commences. Firms that enter the TPR will become subject to FCA supervision and will be required to comply with the CCA provisions and FCA rules applicable to their BNPL products.
Treatment of Existing Agreements Made Before Regulation Day
Agreements that were entered into or brokered by firms before the day regulation commences will continue to be exempt.
The government is ambitious that the legislation for the regulation of BNPL products will be laid before Parliament during 2023. The FCA proposes to publish a consultation on its proposed conduct rules, as well as rules for firms operating under the TPR, prior to the commencement of the parliamentary process.
The final form of the BNPL legislation and related FCA conduct rules remains to be seen. It also remains to be seen what effect the broader reform of the CCA regime will have on the requirements relating to BNPL credit agreements. However, the firms that provide, or are planning to provide, BNPL services in the UK should consider how the proposed reforms could affect their businesses and consider responding to the Consultation directly and/or through a trade association.
Merchants that provide BNPL payment options at checkout should consider how they will satisfy the requirement to ensure that promotions of agreements that will be brought into regulation are approved by an authorized person, which could in principle be the BNPL lender itself.
1 “Relevant recipients of credit” include: (a) a partnership consisting of two or three persons not all of whom are bodies corporate or (b) an unincorporated body of persons that does not consist entirely of bodies corporate and is not a partnership.
2 The text of this consultation, which was published on October 21, 2021 is available here.
3 The UK government has committed to broader reform of the CCA and published a consultation on this subject on December 9, 2022.
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