HM Treasury has published its policy approach response following the consultation on the regulation of buy now pay later products (BNPL). The response sets out what will be brought within the regulatory perimeter and which regulatory controls will apply to agreements within regulation.
The regulatory perimeter – what is in and what is out
In: BNPL and other currently exempt short term interest free credit agreements (STIFC) when provided by third party lenders will be brought within the regulatory perimeter. This means that lenders offering these products will need to be approved by the FCA.
Out: some arrangements that are currently exempt – including invoicing, arrangements which allow insurance policies to be paid for in monthly instalments, charge cards, trade credit and most interest free employer-employee lending - will remain so as they generally aren't a risk to consumers, and regulation would likely to hamper day-to-day lending and the provision of useful forms of credit.
TBD: further stakeholder engagement is required to understand more fully the merchant-offered STIFC market in order to decide whether this type of STIFC should also be brought within regulatory scope.
Regulatory controls which will apply to agreements brought within the perimeter
HM Treasury's policy approach is that regulatory controls applied to agreements which are brought into regulation must be proportionate to the risk they present and able to provide sufficient consumer protection:
Credit broking: merchants (other than those who visit customers in their homes) who offer agreements brought into regulation will be exempt from credit broking.
Advertising and promotions: a financial promotions regime will apply to merchants offering BNPL and STIFC products as payment options. This means that merchants' promotions of BNPL products will have to be approved by an authorised person (which could be their BNPL lender partner).
Pre-contract information: the more flexible FCA-rules based regime in CONC (rather than the Consumer Credit Act 1974 (CCA) pre-contractual provisions) will apply to agreements brought within regulation.
Form and content of agreements: the form and content of BNPL and STIFC agreements will be prescribed in secondary legislation made under the CCA.
Improper execution: the CCA improper execution provisions - which provide that an agreement which does not contain the prescribed content in the prescribed manner is unenforceable by the lender except on a court order – will apply with some bespoke tailoring for agreements that are brought into regulation.
Credit worthiness and credit files: the FCA's current rules on creditworthiness assessments will apply to agreements brought within regulation. The FCA will decide if the rules need to be tailored for these products.
Arrears and forbearance: the CCA requirements on the treatment of consumers in financial difficulty will apply to the agreements brought into regulation, although tailoring of the CCA post-contractual information requirements may be required to reflect the short-term nature of the products involved. The FCA will consult on its proposals for rules on arrears, default and forbearance for BNPL and STIFC agreements in due course.
Section 75: section 75 will apply to agreements that are brought within the scope of regulation. Some BNPL transactions may not meet the financial threshold (credit of more than £100) and some business models may break the debtor-creditor-supplier relationship such that section 75 will not apply.
Small agreements: provisions in the CCA which exempt agreements which do not exceed £50 from certain provisions of the CCA will not apply to BNPL agreements.
FOS jurisdiction: consumers will be able to access the FOS for issues concerning the conduct of lenders.
Next steps
1 August 2022 is the deadline for stakeholders' views on the regulation of online or distance merchant-provided STIFC.
A further consultation on draft legislation will follow by the end of the 2022 and secondary legislation will be laid mid-2023 confirming the scope and framework of the new regulatory regime.
The FCA will also consult on its approach for the new regime, and a transition period for firms to acclimatise to the new regulatory requirements needs to factored into the timeline. The new framework is unlikely to be in place before 2024.
As we have commented before here, BNPL reforms have been slow, the BNPL market continues to evolve and cost of living pressures for consumers are mounting. The BNPL reforms will be made against the backdrop of wider reforms to the CCA which we discussed here.
While BNPL and CCA reforms are firmly on the legislative agenda, HM Treasury's response contained few surprises. It signposts the government's policy approach and direction of reform but the real detail will be in the draft legislation in the further consultation at the end of the year.
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