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. 

FCA Consumer Duty Implementation: Are Firms Trying To Wing It?

The UK's Financial Conduct Authority has conducted a review of firms' progress in implementing the new Consumer Duty for new or existing products by 31 July 2023 (and for closed products with existing customers by 31 July 2024). Firms had until 31 October 2022 for their board to approve their implementation plan and show that it has scrutinised and challenged the plans to ensure they are deliverable and robust. Since then, the FCA has checked on larger firms with dedicated FCA supervision teams and found that: 

"some firms may be further behind in their thinking and planning for the Duty. This brings a risk that they may not be ready in time, or they may struggle to embed the Duty effectively throughout their business."

Aside from my February blog post here, I summarised the Consumer Duty requirements and key steps for implementation in a Keynote last September. That explains there is another recommended milestone at the end of April and the board must also oversee progress to ensure deadlines are met...

 

However, the FCA has published detailed findings across six aspects of the implementation process which shows where firms may be falling short. Generally, in the remaining six months to the end of July, the FCA wants firms to: 

• ensure they are prioritising efforts where they are likely to be furthest away from the requirements; 
• carefully consider the substantive requirements in reviewing products, services, communications, customer journeys and identify/make the changes needed; and 
• work on all this with other firms in their distribution chain. 

Please let me know if you need assistance.

UK Review of the Payment Services (and E-money) Regulations

The Treasury is calling for evidence to assist in its review of the Payment Services Regulations 2017. This also necessarily involves consideration of the Electronic Money Regulations 2011, since e-money institutions are subject to both. Those regulations implemented corresponding EU directives that are also being reviewed (which the Treasury ignores). You have until 7 April 2023 to submit responses to the UK process. Please let me know if you would like assistance.

Of course, 'elephant in the room' is whether the UK regulations should remain harmonised with the EU directives that they implemented, particularly as most UK payment service providers will have EEA aspirations, at least, if not their own regulated firms within the trade bloc. Indeed, the UK review will seem eerily familiar to many, because the European Commission embarked on its own review of the second Payment Services Directive (PSD2) in May 2022; and in July the European Banking Authority proposed numerous changes that I summarised for Ogier Leman in Ireland, including the merger of PSD2 and the second E-money Directive (EMD2). I suspect the UK review is timed to coincide with likely changes arising from the EU's review process. The timing might not work perfectly, so the UK might make any changes that seem settled or non-controversial in the EU process, then mop up the rest in due course.

The UK government believes that its e-money and payment services regulation should address: 

• 'authorised push payment' (APP) fraud; 
• whether 'strong customer authentication' requirements are too prescriptive and should be 'outcome-based' including delaying payments where APP fraud is suspected to allow for communication with a potentially affected customer;
• the use of cryptoassets or cryptocurrencies as payment methods.

There is no mention of the European Commission or EBA proposals relating to the review of PSD2 and EMD2, let alone consideration of whether those proposals should be addressed in the UK. I guess that is left to the rest of us to consider and submit.

The UK has already made changes to its insolvency regime to cater for the more orderly and efficient wind-down of payment and e-money institutions, as this was something that the EU directives did not really address (aside from the 'pooling' provisions relating to safeguarded funds). The UK government is also inviting evidence on whether these additional arrangements are adequate (and the EBA has urged greater clarity on wind-down arrangements under the EU directive(s).

The government persists in its tediously jingoistic claims that the UK somehow pioneered 'Open Banking' through the API requirements proposed by the Competition and Markets Authority in 2016 (among other remedies to improve competition for retail banking). However, that happened three years after the specific open banking requirements were proposed in the first version of PSD2. In fact, such 'open data' and 'midata' initiatives were fully developed by 2012 common across Europe and, indeed, globally within the context of the World Economic Forum, as I posted at the time. It cites unspecified plans to ‘develop’ and ‘progress’ such services through a Joint Regulatory Oversight Committee after the CMA found that its mandated Open Banking Implementation Entity was improperly managed and lacked corporate governance.

While omitting a focus on whether banks unfairly withhold payment accounts from innovative financial services businesses, the consultation also includes highly irregular claims that the government is concerned about whether payment service providers might be terminating customer relationships in reaction to the customers' right wing, 'libertarian' political views. The paper concedes that there is no evidence at all that this is a genuine issue, merely citing assertions from a Conservative MP based on speculation by a conservative pundit about why PayPal might have regarded his accounts as suspicious. That such nonsense has found its way into a Treasury consultation paper is deeply worrying. It smacks of the false claims about Channel 4's activities by the then Culture Secretary, ironic given the government's decision to boycott and later sell Channel 4 in reaction to what it believed was unwarranted scrutiny of its activities by journalists. Just as the government has been forced to row back on the sale of Channel 4, it would seem unwise to politicise payment services regulation...

Though maybe the drafts-person was fully aware of the irony in referring to the 'Daily Sceptic' and the 'Free Speech Union' in the context of better ways to combat APP fraud.  

Overdue Reform of the UK Consumer Credit Act

The Treasury is consulting on a long overdue overhaul of the Consumer Credit Act 1974 (CCA) which covers the UK’s £200bn non-mortgage consumer credit industry, including personal loans, credit cards, hire purchase and pawn-broking. I'm waiting on publication of a longer note summarising the detail, and will post a link to that here. You have until 17 March 2023 to respond. Let me know if I can help you in understanding the proposals and likely impact. 

Brexit

As previously mentioned, the current consultation was actually proposed in June, just prior to the European Commission proposal for a new Consumer Credit Directive (CCD2).  Extensive changes were made to the CCA in 2010 to implement CCD1, which had considerable input from the UK. 

Supervision of the CCA transferred from the Office of Fair Trading to the Financial Conduct Authority  in 2014 under the Financial Services and Markets Act 2000 (FSMA). This meant adding consumer credit and hire agreements, and related activities, to the FSMA (Regulated Activities) Order 20012 (RAO); and transferring some CCA regulations to the FCA’s rules. The Treasury now wishes to transfer “the majority” of the CCA to FCA rules, which seem likely to align with CCD2. 

Some aspects that are specific to Scotland and Northern Ireland will be addressed later in the review process.

Scope and Impact

The CCA regulates consumer credit and consumer hire, although the latter has less protection. The government has already announced plans to regulate many Buy-Now Pay-Later (BNPL) products that are currently unregulated. 

Broadly, the activities of entering into regulated credit and hire agreements require FCA authorisation and specific permission when carried on by way of business, as do the activities of exercising the rights of a lender (or owner, for hire purposes) and various ‘ancillary services’ such as credit broking, debt collection, debt counselling, debt adjusting, debt administration, operating an electronic system in relation to lending (peer to peer lending), credit information services. 

Advertising credit and hire products is also regulated, even for unauthorised firms. 

The FCA’s new Consumer Duty does not apply to unregulated or exempt individuals or products in the same way as the CCA regime, but that new duty changes the context in which the CCA protections operate; and makes authorised firms liable for certain activities of unauthorised firms in the product 'distribution chain'.

About 6,000 authorised firms have permission to enter into consumer credit or consumer hire agreements; and 36,000 FCA firms have credit permissions (mainly credit broking). 

I will update this post with a link to the more detailed note shortly.

Treasury Tinkers With Payment Account Transparency

When the UK government finally acted to improve transparency in retail banking fees and charges, it sparked a similar effort in Brussels that the UK negotiated to align with its own initiatives. This resulted in the Payment Accounts Directive which the UK implemented via the Payment Accounts Regulations 2015 (PARs). Unfortunately (as the FCA later pointed out) the Treasury 'gold-plated' the implementation, by simply cutting and pasting the Directive. The EU was due to review the Directive in 2019, though that is yet to complete. Meanwhile, the Treasury completed its own review in 2021. Struggling to find any 'Brexit benefits', the Treasury has come up with the wheeze of timing its consultation on how payment account fees are presented to consumers with the political gestures announced by the Chancellor today as some kind of post-Brexit renaissance for Britain's financial services industry, now starved of access to its biggest market. You have until 23 February to have your say on these particular changes [yawns].

Among other things required by the PARs, payment service providers must: 

• provide customers with a fee information document that sets out the fees associated with the payment account in a specific form (FID);
• provide each customer with a statements of fees incurred on the payment account in a given period (SoFs) in a specific form; 
• inform customers of whether it is possible to purchase a payment account separately, where it's offered as part of a package, and provide the consumer with separate information regarding the costs and fees associated with each of the other products in the package.

The Money and Pensions Service (MaPS) is also required to provide consumers with access to a website comparing fees charged by payment service providers (I challenge you to find this!).

The Treasury now wants to know your thoughts on the following questions:

Question 1 Do you consider the requirement for payment service providers to provide consumers with FIDs to have any positive impacts (e.g. supporting transparency and comparability of fee information related to payment accounts)?  

Question 2 Do you consider the requirement for payment service providers to provide consumers with FIDs to have any negative impacts (e.g. admin costs or duplication of information already provided)?  

Question 3 Do you consider the requirement for payment service providers to provide consumers with SoFs to have any positive impacts (e.g. supporting transparency and comparability of fee information)? 

Question 4 Do you consider the requirement for payment service providers to provide consumers with SOFs to have any negative impacts (e.g. administration costs or duplication of information already provided)?  

Question 5 Do you consider the presentational requirements (under Schedules 1 and 2 of the PARs) to be necessary? Could consumers be provided with the same or equivalent information by simpler or alternative means?  

Question 6 Do you consider the requirements for the FCA to maintain a linked services list, and for payment service providers to provide customers with a glossary of related definitions, to have any positive impacts (towards supporting transparency and comparability of fee information)? 

Question 7 Do you consider the requirement for the FCA to maintain a linked services list, and for payment service providers to provide customers with a glossary of related definitions, to have any negative impacts?  

Question 8 Do you consider the requirements for the Money and Pensions Service (MaPS) to provide consumers with access to a website comparing fees charges by payment service providers to have any positive impacts towards supporting transparency and comparability of fee information beyond private sector providers? Or could the same objectives be fulfilled without these specific requirements? 

Question 9 Where relevant, what are the costs to your organisation of adhering to Part 2 and Schedules 1 and 2 of the PARs?  

Question 10 Can you foresee any potential unintended consequences or negative impacts of removing any requirements under Part 2 and Schedules 1 and 2 of the PARs? 

Question 11 Do you have any other views on Part 2 and Schedules 1 and 2 of the PARs that you wish to share?