The government's most recent consultation paper on the regulation of buy now pay later (BNPL) agreements gives the FCA considerable discretion to mould the shape of the new regulatory framework for BNPL products. In addition to new BNPL-specific FCA rules, the Consumer Duty will also have a key role in setting the standards for BNPL lending.
In the consultation paper the government is mindful of the wider consumer credit regime review yet to take place. The proposed removal of the current Consumer Credit Act 1974 (CCA) exemption for BNPL products will mean that these will fall within the consumer credit regime and be subject to CCA requirements, but the government proposes a much wider disapplication of CCA provisions than was put forward in earlier consultations. Instead, the heavy lifting will be undertaken by new or adapted FCA rules and the Consumer Duty. This will be welcomed by many BNPL lenders and reflects the direction of regulatory travel away from prescriptive rules towards more flexible and outcomes-based rules.
Below we look at the government's key proposals for regulation of BNPL and consider what this may mean for the wider credit regime review.
The current regulatory position
Most BNPL agreements are exempt from consumer credit regulation under article 60F(2) of the Regulated Activities Order as they are borrower-lender supplier agreements for interest- and charge-free fixed-sum credit, repayable in 12 or fewer payments within a period of up to 12 months.
Because of this exemption BNPL agreements do not currently have to comply with the provisions of the CCA, and firms which offer the agreements do not have to be FCA-authorised or comply with FCA rules which apply to consumer credit products. The Financial Ombudsman Service (FOS) has no jurisdiction in relation to BNPL agreements.
The proposed changes
Scope: BNPL agreements will be brought within regulation where they are offered by a third-party lender. This means that firms will have to be FCA-authorised to offer BNPL products and the FCA will supervise and set rules for those firms. Some provisions of the CCA will also apply.
BNPL agreements provided directly by the provider of the goods and services financed by the agreement will continue to be exempt from regulation. These are the type of low-risk, day-to-day transactions which the government is keen not to capture within the regulatory perimeter.
Other agreements perceived to be low-risk – including agreements financing insurance contracts, agreements offered by registered social landlords to tenants (eg to purchase white goods) and employer/employee lending (eg for travel season tickets) – will remain exempt.
Credit broking and financial promotions: merchants offering BNPL products as a payment option will not need to be licensed as credit brokers but will have to get their promotions approved by an authorised person with financial promotions permissions unless an exemption applies.
Information requirements: an FCA Handbook information disclosure regime will be used to ensure that consumers have a good understanding of BNPL products so they can make informed decisions before entering into the agreement, over the course of the agreement and when they are facing financial difficulty. The CCA disclosure framework will be disapplied for BNPL agreements.
This seems appropriate given that BNPL products are generally simple products, are short in duration and interest-free, and mostly BNPL agreements offered online and taken out on a mobile device. CCA information requirements would be a poor fit for products with these characteristics.
The FCA will develop a modernised disclosure regime for BNPL agreements in line with the Consumer Duty and taking into consideration the suitability of the Consumer Credit sourcebook (CONC) requirements for BNPL lending.
Sanctions: as the disclosure regime will be based primarily in FCA rules and as certain of the CCA provisions will be disapplied for BNPL products, the CCA sanctions around unenforceability of agreements without a court order, unenforceability of agreements during breach and creditor disentitlement to interest and default charges during periods of non-compliance will also fall away. Instead, consumer protections will lie in FCA oversight of BNPL firms, CONC rules as applied to or extended for BNPL products, the Consumer Duty and ultimately via the FOS, which will have jurisdiction in respect of BNPL agreements under the new regime.
Regulatory controls and debtor protections: various regulatory controls within the consumer credit regime will apply to BNPL products including CCA section 75 liability, FCA rule-based creditworthiness and affordability assessments, credit reporting and, as noted above, the ability to take complaints to the FOS.
While section 75 liability and the ability to escalate complaints to the FOS may have limited actual benefits to BNPL debtors, because the average BNPL spend is below the £100 minimum for section 75 and FOS case fees may be prohibitive, the CCA unfair relationships will provide protection to debtors where the courts find unfairness.
Voluntary compliance with disapplied CCA provisions: it will be for the FCA to decide whether or not lenders which offer currently exempt BNPL agreements alongside other regulated agreements may use the same CCA-compliant documentation for both.
Temporary permissions regime: to facilitate the speedy introduction of BNPL regulation a temporary permissions regime will be put in place allowing unauthorised firms to continue to operate their BNPL lending until their application for full authorisation is processed. There will be a two-staged approach to the introduction of FCA rules, the first to set up the TPR and allow the FCA to consult on new rules followed 12 months later by 'regulation day', when the TPR will go live and the new rules will come into force.
Comment
The government has taken a sensible approach to BNPL regulation; rather than basing the BNPL regulatory framework fully on legislation and rules which were not written with this type of lending in mind it has set the FCA the task of drafting a BNPL-appropriate regime.
This means that much of the detail of the regulatory framework is still to come, in the form of FCA rules and guidance on what compliance with the Consumer Duty looks like for BNPL products. It will be interesting to see the FCA approach to this exercise as it will likely set the tone for the wider consumer credit regime reform. It will also be worth keeping an eye on how a failure to deliver good outcomes under the Consumer Duty might inform courts' views of unfairness under the CCA unfair relationships provisions.
Given the pressing need to regulate BNPL lending and since most of the proposals have already been consulted on, the consultation is only open for 6 weeks. The deadline for responses is 29 November 2024.
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