The popularity of the deferred payment credit sector among consumers in the UK continues on an upward trajectory. A global pandemic resulting in lockdown and a boom in online shopping coupled with a cost-of-living crisis, which followed hot on the heels of the pandemic, has created the perfect environment for the "buy-now-pay-later" (the "BNPL") sector to thrive, with many consumers taking the opportunity to spread their purchases into more manageable instalments.
Readers will no doubt be familiar with seeing the option to spread the cost of purchases when proceeding to online check out or may have been offered the option at the till, when shopping in store. It is not just specialist short term lenders who are interested in the deferred payment credit sector; several banks and traditional lenders have launched their own BNPL products and platforms in recent months, seeking to capitalise on the popularity of the space and to capture the income diverted from traditional deferred payment options such as personal credit cards and loans.
Current regulatory landscape
BNPL products currently benefit from an exemption to Financial Conduct Authority ("FCA") regulation, but regulation for short term interest free credit is on the horizon. Regulatory reform has been prompted by the Woolard Review of the unsecured credit market (which we have discussed here), published in February 2021, which recommended that the law should be changed to bring BNPL products within the FCA's perimeter as a matter of urgency.
The Woolard Review recognised that innovative BNPL products provided important benefits for consumers but also had potential to cause harm by providing consumers with a relatively frictionless means of accessing credit across multiple BNPL products. It is clear that the Government in its consultation on draft legislation is seeking to strike the right balance with the draft legislation, protecting customers while recognising the need for continued access to short term credit and that many retailers / businesses have utilised deferred credit products for many years with little evidence of causing harm to consumers.
Proposals for regulatory change
The reform proposals can be summarised as follows:
- Regulation would apply to borrower-lender-supplier agreements for fixed sum credit to individuals that are:
- interest free;
- repayable in 12 or fewer instalments within 12 months or less;
- provided by a person that is not the provider of the goods or services being bought (i.e. a third party lender); and
- not exempt.
- This means that the new regulation would not apply to where the BNPL agreement / product is offered directly by the retailer.
- The limited exempt categories cover agreements financing contracts of insurance, agreements offered by registered social landlords to tenants and leaseholders and employer-to-employee loans, even where third party lenders are involved.
- Retailers which only offer BNPL credit provided by a third party lender will not be required to have a credit broking permission, but either the third party lender or another authorised person will need to approve any financial promotion published by the retailer.
- FCA rules will determine what pre-contract information will be required for BNPL lending but the BNPL agreements themselves will need to comply with Consumer Credit Act 1974 (the "CCA") requirements.
- Where lenders fail to comply with the CCA agreement's requirements the agreements will be unenforceable without a court order, and section 75 of the CCA will apply (imposing a liability on creditors to consumers for contract breaches / misrepresentations).
- Temporary permissions regime will apply to allow existing unauthorised BNPL lenders to continue to operate while they go through the process of applying for authorisation.
- Grandfathering will apply to allow existing agreements to continue to be exempt.
What is next?
The consultation closed on 11 April with the intention that new legislation will come into force by the end of 2023. BNPL providers should be considering now the effect of the proposed legislative amendments on their products and processes and planning for FCA authorisation and regulation.
Please speak to a member of the Securitisation team if you are interested in finding out more about the securitisation of consumer receivables.