UK Consults On BNPL Regulation

Further to my note in June, the UK Treasury is now consulting on the enabling legislation necessary to narrow the exemption for Buy Now Pay Later (BNPL) products, paving the way for greater supervision of the sector by the Financial Conduct Authority. I've included a quick summary of the provisions below. If you need assistance in understanding the potential impact of the proposed regulatory changes, please let me know.

Basically, the scope of consumer credit regulation is being expanded to include BNPL agreements offered by lenders but not by suppliers directly. The government had intended to regulate all BNPL agreements provided by suppliers either online or at a distance, but this was found to disproportionately impact many types of arrangement where there is little, if any, evidence of consumer detriment.

In effect BNPL agreements will be regulated where they are 'borrower-lender-supplier' agreements for  fixed-sum credit (the existing 'running accounts exemption' is not affected) to individuals, small partnerships etc., which are: 

• interest-free; 
• repayable in 12 or fewer instalments within 12 months or less; 
• 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 specifically exempt under other consumer credit exemptions (plus a new, related exemption). 

There's an 'anti-avoidance' measure to capture agreements where the merchant has an arrangement with the third-party lender to sell the goods to the lender at the point when the agreement is taken out (seeking to turn the lender into a supplier). 

Trade credit and invoicing arrangements will remain exempt, but new specific carve-outs have had to be made to finance insurance contracts/premiums; registered social landlords to their tenants to finance the provision of goods and services; and where the borrowers are employees and which result from an arrangement between their employer and the lender or supplier.

The relevant agreements will qualify as regulated credit agreements within the consumer credit regime under the Regulated Activities Order (RAO). Firms offering those agreements and related regulated activities will need to be authorised and supervised by the FCA, with complaints referable to the Financial Ombudsman Service. 

These agreements will not benefit from lighter regulation that applies to 'small agreements' but will be spared certain pre-contract explanations under the Consumer Credit Act 1974 (CCA) in favour of more proportionate FCA disclosure rules. Consumers are also spared a deluge of information because certain other distance marketing disclosures won't need to be made for these agreements by unauthorised brokers where the information has already been provided by the authorised lender.

Those introducing borrowers to lenders to obtain regulated BNPL agreements will not need to be authorised for credit broking unless conducting that activity in the borrower's home.   

Advertisements and other 'financial promotions' communicated by unauthorised firms for regulated BNPL agreements will need to be pre-approved by an FCA authorised firm (which will not include a firm acting as a payment or e-money institution).

The new regulations won't apply to relevant agreements entered into prior to the changes taking effect; and there are transitional arrangements to enable firms to carry on certain regulated activities in relation to regulated BNPL agreements for a limited time to allow them to get properly authorised, but the duration is a matter for the FCA. It's worth noting, however, that any business that does take advantage of the 'temporary permission regime' must comply with the law and FCA rules applicable to consumer lending (or exercising a lender's rights) and credit broking (if visiting borrowers' homes). That is unlike previous 'grandfathering' type arrangements, where firms could continue as they were until authorised; and potentially problematic, as any unregulated lender offering BNPL today would likely face a very steep climb to operating on a regulated basis.  

It is also left to the FCA to determine how its rules on credit checks, which could prove a thorny issue to the extent we are focusing on borrowers who can't afford the price of fairly low value consumer items. 

But there remains uncertainty over the extent to which the form of agreements and post-contractual notices will be prescribed.

The limits for the application of 'section 75' CCA liability for suppliers will not be altered (£100 to £30,000).

If you need assistance in understanding the potential impact of the proposed regulatory changes, please let me know.

UK Regulatory Warns Again On Cryptoasset Promotions

The FCA has explained again that there are currently only three ways to communicate cryptoasset promotions to UK consumers, with a fourth channel pending:

1. via an FCA/FSMA authorised firm [which does not include an e-money or payment institution for these purposes]. 
2. via an unauthorised firm but approved by an FCA authorised firm [the govt is proposing a regulatory 'gateway' for authorised firms that wish to approve financial promotions for unauthorised firms]. 
3. a cryptoasset business registered under money laundering regulation with the FCA (cryptoasset exchange and custodian wallet providers), communicating its own promotions [under a pending exemption].
4. the promotion otherwise complies with the terms of an exemption in the Financial Promotion Order.

Even with the new route, promotions not made using one of these channels will constitute a criminal offence punishable by up to 2 years imprisonment.

This post is for information purposes and does not constitute legal advice. Please let me know if you need legal assistance in this area.

UK Marketing Rules For Crypto: Muddy Waters?

Amid the sound and fury of crashing crypto businesses you could be forgiven for having forgotten that the UK government was 'busy' consulting on extending its rules for marketing financial services to cover certain 'cryptoassets'. Those rules are still not published, but we are told today they are on the way. There will then be a six month transition period before they take effect. But beware a few twists...

Qualifying cryptoassets

This might change, but for now the government has broadened the scope of ‘qualifying cryptoasset’ to mean 'any cryptographically secured digital representation of value or contractual rights which is fungible and transferable'. It will not matter, therefore, whether or not the cryptoasset is based on distributed ledger technology (DLT). That technology-neutral approach is consistent with the proposed regulatory treatment of stablecoins used as a means of payment (or 'digital settlement asset').

The definition will specifically exclude: 

• investments already 'controlled' under financial promotions rules;
• electronic money under the Electronic Money Regulations 2011;
• central bank (digital) money; and
• cryptoassets that are only transferable to one or more vendors or merchants in payment for goods or services, such as tokens used as travel passes, lunch passes, and supermarket loyalty schemes which happen to be cryptographically secure.  

The government has decided to retain the requirement for a qualifying cryptoasset to be 'fungible', on the basis that non-fungible tokens (NFTs) may represent non-financial services products, the NFT market is evolving rapidly and "the government does not yet have sufficient information on risks and use-cases". But it might act later. 

'Wrapping' a fungible token inside an NFT is risky because that might not remove its fungibility and involves a case-by-case assessment - fungibility is not a feature of the asset itself but the context (in some circumstances they might be treated as interchangeable).  

Whether tokens that might have several uses (‘hybrid tokens’) have at least one use that meets the test of a 'qualifying cryptoasset' (or another controlled investment) will be judged at the time the promotion is issued: 

"unregulated cryptoassets such as utility and exchange tokens into the scope of the financial promotions regime (provided they fall within the definition of ‘qualifying cryptoasset’), and security tokens are already captured as controlled investments."  

Note that if a token will qualify as a security token at any time in its lifecycle then it must be treated as one from the outset. 

Controlled activities 

A relevant 'financial promotion' is one that induces someone to engage in a 'controlled activity' in relation to a qualifying cryptoasset. For this purpose there will be no new specific "controlled activities" that will apply only to qualifying cryptoassets. So the activities that promotions must relate to are: 

• dealing in securities and contractually based investments 
• arranging deals in investments 
• managing investments 
• advising on investments 
• agreeing to carry on specified kinds of activity 

The government considers the restrictions would not apply to promotions that simply say that a retailer/seller is willing to accept (or offer) qualifying cryptoassets in exchange for goods and services (e.g. a sign at a retail checkout that says ‘we accept crypto’). Since that is not an investment activity of the "controlled" kind listed above, it is simply out of scope entirely and it is unnecessary to specifically exempt it. 

Exemptions

Whether the usual array of exemptions apply to qualifying cryptoassets and related controlled activities will be consistent with the way that the usual exemptions apply more broadly, so there will be no different approach specifically for cryptoassets.

This post does not constitute legal advice. If you need any assistance, please let me know.