Introduction

HM Treasury has now released its final consultation on the proposed legislative changes to bring currently unregulated buy-now-pay-later (BNPL) products into scope of the UK Consumer Credit Act 1974, and FCA regulation.

These proposals, together with the earlier consultation documentation and responses from HM Treasury set out a new, proportionate regulatory framework for BNPL agreements. In a relief to merchants across a range of sectors, HM Treasury has decided to exclude merchants from the scope of the new licensing and supervision regime when they provide BNPL agreements to support the purchase of their own goods or services, and to focus requirements on BNPL agreements provided by third party lenders. There will, however be significant impacts for any merchants making BNPL available as a payment option, including the reforms to the scope of the financial promotions regime. Taken together, these are major reforms with wide-reaching consequences not just for the BNPL sector, but for the merchants who have embraced this technology and payment feature, and the millions of consumers who are reported to enter into BNPL agreements each year.

In the UK the term ‘BNPL’ actually covers a wide range of credit agreements, generally used by consumers to spread the cost of purchases of goods or services. While there are some BNPL arrangements that are regulated in the UK by the FCA, others are not. Unsecured consumer credit is regulated in the UK under the framework provided by the Consumer Credit Act 1974 (CCA 1974) and the Financial Services and Markets Act 2000 (FSMA). The scope of regulation, that is exactly which types of agreement are regulated and which are not, is set out in detail in the FSMA (Regulated Activities) Order 2001 (RAO). In particular, a legislative exemption is contained in Article 60F(2) of the RAO which exempts from regulation interest-free agreements repayable in under 12 months and in 12 or fewer instalments. This exemption, sometimes known as the ‘Article 60F(2) exemption’, is often used to cover BNPL agreements, other types of short-term interest free credit and day to day business activities like invoicing.

Firms which offer regulated credit agreements must be authorised to do so by the FCA, and must comply with relevant FCA rules as well as requirements in the CCA 1974.  Whilst the FCA may not regulate all BNPL products it has been very active in addressing concerns regarding potential harms to consumers. For example, in August 2022, in its Dear CEO letter, the FCA warned BNPL firms and merchants offering BNPL products about misleading adverts.

In June last year the Government issued a response document to an earlier consultation on BNPL. In this document the Government set out a number of important reforms including that the UK’s regulatory perimeter be extended so that it would capture BNPL and other currently exempt agreements (referred to as short-term interest-free credit (STIFC)) when provided by third-party lenders. The Government was also minded to extend the regulatory perimeter so that it would capture STIFC provided directly by merchants where it is offered online or at a distance, but felt that further stakeholder engagement was necessary to fully understand the scale of the merchant-offered STIFC market.

Latest consultation

On 14 February 2023, HM Treasury issued a consultation document which summarises the feedback received from stakeholders on the additional questions on the scope of regulation that were asked in the Government’s June response document and also seeks comments on the draft legislation which will bring BNPL products within the regulatory perimeter.

HM Treasury reports that the evidence from stakeholders indicates that it would be disproportionate for regulation to apply to all agreements provided by merchants online or at a distance, as it would potentially capture the types of arrangement where there is little, if any, evidence of there being a substantive risk of consumer detriment. With this in mind the Government is limiting the scope of regulation to BNPL agreements that are offered by third party lenders (unless they fall within an exemption, see below). To achieve this HM Treasury has published draft legislation in the form of The Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2023. When finalised this statutory instrument will amend Article 60F of the RAO as well as other Regulations.

The outcome of the amendments to Article 60F of the RAO will mean that agreements will become regulated where they are borrower-lender-supplier agreements for fixed-sum credit to individuals or relevant recipients of credit which are:

• interest-free, repayable in 12 or fewer instalments within 12 months or less;
• where the credit is provided by a person that is not the provider of goods or services which the credit agreement finances (i.e. third-party lenders); and
• not exempt as a result of falling within one of the exemptions (see below).

For those agreements that are brought into regulation HM Treasury is proposing to dis-apply section 55 of the CCA 1974 which will mean that firms offering newly regulated agreements will not need to comply with the requirements of the Consumer Credit (Disclosure of Information) Regulations 2010 which are made under section 55. The corresponding sanction of unenforceability without a court order in section 55(2) of the CCA 1974 will not be applicable. Instead, firms will need to comply with the FCA rules on pre-contractual disclosure of information.

Exemptions

In the draft statutory instrument HM Treasury has inserted a provision which provides for the continued exclusion of interest-free borrower-lender-supplier credit agreements, repayable in under 12 months and in 12 or fewer instalments which finance premiums for contracts of insurance where they are provided by a third party which is not the provider of the insurance contract.

HM Treasury has also included a provision which excludes from regulation interest-free borrower-lender-supplier credit agreements repayable in under 12 months and in 12 or fewer instalments provided by registered social landlords to their tenants to finance the provision of goods and services.

In addition, a further provision has been included which allows credit agreements where the borrowers are employees and which result from an arrangement between their employer and the lender or supplier to continue to use the A60F(2) exemption.

Interest free running account credit

The amendments to Article 60F RAO do not impact Article 60F(3) of the RAO which provides an exemption from regulation for certain types of interest-free running account credit. The Government has not amended this provision on the basis that lenders would not be able to replicate the effect of Article 60F(2) lending under the Article 60F(3) exemption.

Business to business lending

A60F(2) agreements that will be brought into regulation made to individuals and relevant recipients of credit will not be regulated where they are more than £25,000 and wholly or predominantly for business purposes, as they will fall in the existing business lending exemption in A60C(3) of the RAO.

Credit broking

The draft statutory instrument also inserts a new Article 36FB in the RAO so that merchants who introduce their customers to the agreements which will now be brought into regulation will be exempt from credit broking regulation.

However, domestic premises suppliers will fall within the regulatory perimeter where they wish to offer newly regulated agreements from a third-party lender as a payment option. Domestic premises suppliers that carry on credit broking activities will need to be FCA authorised. The consultation describes a domestic premises supplier as one that sells goods, offers or agrees to sell goods, or offers or contracts to supply services, to individuals while the supplier or the supplier’s representative is physically present in the customer’s home.

Small agreements

HM Treasury is proposing that the small agreements provisions in section 17 of the CCA 1974 be dis-applied for newly regulated agreements. This means that the CCA 1974 requirements will apply to BNPL agreements which do not exceed £50. HM Treasury is proposing this to provide consistent consumer protection across all BNPL agreements.

Financial promotions

HM Treasury sets out proposals in the consultation which seeks to ensure that unauthorised merchants will be required to have their promotions approved by an authorised person.

Temporary permissions regime

In the consultation paper HM Treasury is proposing a temporary permissions regime (TPR) which will allow firms to transfer into the new regulatory regime before seeking full FCA authorisation at a future date. Firms will need to register with the FCA for entry into the TPR before the day on which regulation commences (regulation day). The intention is that firms in the TPR will be deemed to be FCA authorised and they will be permitted to undertake the relevant regulated activities relating to newly regulated agreements, and will need to comply with the relevant FCA rules. In addition, the FCA will supervise these firms and take enforcement action against them if necessary.

Those credit agreements that are entered into or brokered by a firm in the TPR after regulation day will be regulated credit agreements. Should a firm exit the TPR before being authorised, it will be prohibited from entering into new regulated credit agreements (or brokering new credit agreements) as they will no longer be deemed authorised.

Such firms will continue to be deemed authorised for servicing those regulated agreements which were entered into whilst the firm had a temporary permission for lending. The FCA will also continue to supervise and be able to take enforcement action against them. The proposed time limit for the duration of this retained temporary permission for servicing agreements is two years. Alternatively, firms will be able to dispose of their loan books to an authorised third-party.

Agreements that exist before regulation

HM Treasury proposes that unregulated exempt agreements that were taken out prior to regulation day will continue to be exempt. Only agreements made on or after regulation day will be regulated.

CCA 1974

As mentioned above firms which offer regulated credit agreements must comply with relevant FCA rules as well as requirements in the CCA 1974. 

In the consultation document the government is keen to get views on whether the requirements for the content of agreements set out in the Consumer Credit (Agreements) Regulations 2010 should apply to those agreements that will be brought into regulation. Also, whilst the government feels that legislative changes are not needed in relation to the trigger points as to when post contractual information should be sent it did state that this could be considered further as part of the broader reforms to the CCA 1974 (the government published a consultation on this subject on 9 December 2022).

Deadline

The deadline for comments on the HM Treasury consultation is 11 April 2023.

Once the consultation is closed HM Treasury will consider the feedback received and make any necessary changes to the draft legislation. It intends to publish a consultation response which will set out the anticipated key milestones for regulation. Following that, the government will lay legislation when Parliamentary time allows, with the ambition that this will be during 2023.

Applying for full authorisation

Once the final draft legislation has been published alongside the government’s consultation response, prior to it being laid before Parliament, the FCA currently plans to publish a consultation on its proposed rules, as well as rules for firms operating on a temporary permission. After considering the responses, the FCA will make rules for the TPR. It is likely that, at this point, firms will be invited to register for the TPR. The FCA is likely to set out the proposed window in which a firm can register for the TPR in its consultation. This window will close on the day the new regulation commences. Thereafter firms will be able to apply for authorisation, and will likely be given landing slots in which they will be asked to submit their application for authorisation.

Future podcast

We will shortly be issuing a podcast commenting on the HM Treasury consultation document.