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.
