On 21 October 2021, HM Treasury issued its long anticipated consultation on the regulation of Buy-Now Pay-Later (BNPL) products.
In February the government announced its intention to bring unregulated interest-free BNPL products within the scope of regulation given the potential risk of consumer detriment highlighted in the Woolard Review. Following the announcement the government tabled an amendment to the then Financial Services Bill (now Financial Services Act 2021) which allows HM Treasury to exclude provisions of the Consumer Credit Act 1974 (CCA) from applying to agreements within relevant exemptions, either when they are brought within the scope of regulation or at any point thereafter.
Purpose of the HM Treasury consultation
In the consultation that HM Treasury has now published the government sets out policy options designed to achieve a proportionate approach to the regulation of BNPL based on the following:
- 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.
- Any burden on merchants offering BNPL as a payment option would be proportionate and manageable and should not disadvantage Small and Medium Enterprises (SMEs) over larger merchants.
In light of this the consultation focuses on scope (identifying and defining precisely which types of credit agreement should come within the regulatory perimeter) and controls (what regulatory controls should be imposed on the credit agreements that newly fall into the scope of regulation).
Some of the key headlines in the consultation concerning scope include:
- The BNPL model represents the most common type of formal credit agreement that falls within the exemption contained in article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). Whilst the Woolard Review noted the potential for consumer detriment with BNPL, there is relatively limited evidence at the moment of widespread consumer detriment materialising. Respondents are asked to provide, among other things, further evidence of consumer detriment in the BNPL market.
- The government has not seen substantive evidence of widespread consumer detriment arising from short-term interest-free credit and is minded to draw the scope of regulation so that such credit agreements can continue outside of the regulatory boundary.
- The government is considering options for how a boundary could be drawn between BNPL and other short-term interest free credit in regulation. It is also aware that drawing an effective regulatory boundary for BNPL will also involve careful examination of the existing exemption from regulation for running-account credit, set out in article 60F(3) of the RAO.
- The government’s view at this stage is that any regulation of BNPL could be accompanied by an exemption so that the broking of BNPL credit by a merchant would not lead to a requirement that the merchant is subject to regulation as a credit broker.
Key potential changes to processes and documentation
Some of the key headlines regarding controls include:
- The government’s view is that the full extent of CCA-mandated pre-contractual information, when coupled with the requirements in FCA regulation, may not be appropriate for BNPL credit agreements. The government is therefore of the view that the regulation of BNPL could rely solely on FCA rules, the detailed requirements for information disclosure in section 55 of the CCA could be dis-applied.
- For lenders that offer both BNPL and CCA loans this may require another template to keep track of their loan products.
- Those BNPL lenders falling within the scope of regulation will need to comply with the FCA’s CONC rules (as may be amended) and conduct creditworthiness exercises.
- The government’s view at this stage is that it would be proportionate to include some requirements around how firms treat customers in financial difficulty. However, as is the case in other areas, it may be that some adaptations are needed to ensure that the objectives for proportionality of the regulation of BNPL are met.
- BNPL lenders may therefore be subject to proportionate application of the post-contractual CCA requirements plus the wider TCF related FCA guidance on how to deal with customers in financial difficulty.
- The government is considering narrowing the scope of section 17 of the CCA (small agreements) so that CCA requirements apply to BNPL agreements under £50.
Deadline for responding to the consultation
The deadline for responding to the consultation is 6 January 2022.