HMT has today published its much-anticipated consultation on regulating the Buy-Now-Pay-Later (BNPL) credit market, following the Woolard Review recommendation that all BNPL products are brought within the regulatory perimeter “as a matter of urgency”. Based on the government’s view that the main drivers of potential consumer detriment are less pronounced for “short-term (eg 12 months+) interest-free credit” than in the rapidly expanding “BNPL” (low value, very short-term) market, the Treasury is not proposing to remove the fixed sum exemption under the RAO entirely but to limit it so as to regulate “BNPL” only. Exactly where the regulatory line will be drawn is, however, still to be confirmed. For now it appears that retailers are likely to be largely excluded from regulation, and lending will be subject to relatively light-touch “proportionate” regulation, but lenders may be concerned at the potential cost of FOS jurisdiction and the non-compliance sanctions for breach of CCA post-contract requirements.
In looking to create a proportionate approach to the regulation of BNPL, the Treasury outlines four objectives in its consultation:
- BNPL activities should be subject to an intervention which is proportionate to the level of risk that they present and is not so burdensome that it inhibits the product being offered or reduces consumer choice;
- Consumers should be adequately and fairly protected from detriment, and can access dispute resolution regarding the conduct of lenders;
- Regulation for BNPL should not adversely impact competition and innovation across the wider consumer credit and payments markets; and
- Any burden on retailers offering BNPL as a payment option would be proportionate and manageable and should not disadvantage SMEs over larger retailers.
Scope of new regulation
Regarding HMT’s views on what types of currently exempt credit agreement the new regulatory regime should apply to, and what types they should not, key points include:
- There is a focus on third-party lending (ie not where a retailer allows deferred payment itself, but where a third-party provider finances it).
- HMT is not proposing to remove the fixed sum exemption under the RAO entirely but to limit it so that “short-term interest-free credit” is not regulated but “BNPL” is. This appears to be based on the government’s analysis to date that the main drivers of potential consumer detriment, as identified by the Woolard Review and elsewhere, are less pronounced for short-term interest-free credit (which has been ‘widespread for decades and has attracted limited scrutiny or concern’) than in the rapidly expanding BNPL market.
- Whilst HMT recognises that there is significant overlap between “short-term interest free credit” and “BNPL”, the features that it appears to focus on in relation to “BNPL” include:
- Low value (eg there is a suggestion that s17 of the Consumer Credit Act 1974 (CCA) may have to be narrowed to exclude BNPL from the ‘small agreements’ carve-out);
- Very short term loans (ie at the lower end of the existing 12 month exemption);
- Ease of repeat use, eg having an ‘account’ with the lender.
- HMT acknowledges the need to ensure that the running-account credit exemption under the RAO does not provide an opportunity for the unregulated BNPL model to transition to and re-emerge under this exemption. This may require consequential amendments to that exemption.
Among other things, HMT invites views on its analysis of the relevant business models and the level of consumer detriment risks that they present.
Form of new regulation
In terms of regulatory controls that could be imposed on credit agreements that would newly fall within the scope of regulation, HMT makes the point that the risks of the BNPL product are ‘inherently lower than an interest-bearing credit product’. In light of this, there are a number of regulatory controls that exist for the mainstream regulated credit market that might be disproportionate in this market. Key points include:
- HMT proposes that any regulation of BNPL could be accompanied by an exemption from credit broking (possibly subject to limited exceptions eg for domestic premises suppliers) so that this would not lead to a requirement that the retailer itself must be authorised when accepting BNPL as a payment method at checkout.
Possible amendment of the relevant legislation so that all promotions of BNPL agreements fall within the financial promotions regime, in conjunction with the already-proposed broader strengthening of the financial promotions regime requiring that any authorised person wishing to approve promotions should go through a gateway process managed by the FCA where they are subject to further checks and training.
- For pre-contractual information, proportionate regulation of BNPL could rely solely on the FCA rules on adequate explanations, disapplying the detailed requirements for information disclosure in section 55 CCA.
- Regarding the requirements on form and content for regulated credit agreements in section 60 CCA and related regulations it may be necessary to develop bespoke legislation on the form and content requirements for BNPL. The consultation seeks views on what this bespoke form and content should look like.
- The CCA provisions on improper execution should apply to BNPL agreements, as should the FCA’s rules on creditworthiness assessments.
- Regulation of BNPL would include some requirements around how firms treat customers in financial difficulty.
- Section 75 CCA should apply to BNPL agreements.
- It would be necessary to consider narrowing the scope of section 17 CCA so that CCA requirements apply to BNPL agreements under £50, given that many BNPL agreements will be below £50, and therefore would otherwise be classed as a ‘small agreement’ for these purposes.
- Consumers should be able to make a BNPL complaint to the FOS.
The Treasury consultation is open until 6 January 2022. The FCA plans to consult on new rules in 2022 and is developing its approach to the authorisation gateway and supervision.