What do your gym membership and your new lockdown winter coat have in common? One will be getting considerably more use than the other currently, but, depending on how you paid for them, they could both have been purchased in reliance on the same exemption from the regulated consumer credit regime.

Short-term interest free credit

Generally, lenders providing credit to individuals have to be authorised by, and comply with the consumer credit rules of, the Financial Conduct Authority (FCA). Certain types of consumer loans are, however, exempt and are therefore not regulated by the FCA. An agreement will be exempt if it is entered into to fund a purchase under existing or contemplated arrangements between the party providing the credit and the supplier of the goods and it is structured such that it is interest free and has to be paid in 12 or fewer instalments within 12 months of the agreement. This exemption for short-term interest free credit, also known as the exemption 'relating to the number of payments', is set out at Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

Interest free 'buy now pay later' (BNPL) credit, where goods, rather than being paid for at the point of purchase, are paid for over a small number of instalments, rely on this exemption, although the exemption originally was not intended for this widespread type of use in the retail sector. It was intended for short-term invoice deferral but is also used by a range of non-financial firms offering interest free credit, such as dentists for repayment plans and gyms for membership fees.

So, if you bought your winter coat online and at checkout clicked to pay using the interest-free BNPL facility, and if you pay your annual gym membership on a monthly payment plan, it's very possible that both of these have been provided to you in reliance upon the Article 60F(2) exemption.

Why is BNPL topical?

Earlier this month saw the publication of a review of change and innovation in the unsecured credit market – known as the Woolard Review (Review) as it was conducted by the FCA's Board's former interim chief executive Chris Woolard – and it recommended that the law should be changed to bring all BNPL products within the FCA's regulatory perimeter as a matter of urgency.

The Review recognises that while market innovations bring important benefits they can also create potential for consumer harm. BNPL usage has increased significantly in the last year; growth in the value of transactions using BNPL more than trebled between January and December 2020, with BNPL usage spikes correlating with the Covid lockdowns last year. While average single BNPL transactions are relatively low (£65-£75) the rising popularity of BNPL products increases the potential for harm.

Multiple purchases using different BNPL lenders are possible, facilitating accruals of around £1000 of debt, without affordability checks and without that debt being visible to credit reference agencies. The risk is that without appropriate regulatory oversight the BNPL market could evolve in a way which is beneficial neither to consumers nor to the wider credit market.

What does this mean for BNPL lenders?

Once BNPL products are fully FCA-regulated, BNPL lenders will need to be authorised and regulated by the FCA. In his letter to HM Treasury Mr Woolard recommended that BNPL regulation should address affordability assessments and treatment of consumers in financial difficulty. BNPL advertising should be brought within the full financial promotions regime, requiring BNPL lenders to give sufficient information about the product and be clear, fair and not misleading.

What does this mean for retailers?

Once BNPL agreements are fully brought within the regulatory perimeter the retailer will need to be authorised for credit broking under Article 36A(1)(a) of the RAO. One option open to those retailers who are not already authorised (larger retailers who already offer regulated credit will already be authorised by the FCA) is to become the Appointed Representative of the BNPL lender under the FCA's Appointed Representatives regime, meaning that it would be the BNPL lender who would have responsibility as principal for ensuring compliance with the FCA rules.

Next steps

While the Review recommends an urgent change to the law, standard procedure would be for consultation to take place on the implementation (including any transitional arrangements) and appropriateness of the rule changes. BNPL lenders and retailers alike should keep a keen eye on developments and consider how changes to the law could affect their businesses, procedures and contractual arrangements.

The impact the rule changes will have on the market remains to be seen, but it seems fairly certain that the customer experience in a BNPL purchase will be different. What this might mean for future online winter coat purchases is uncertain but as far as the gym membership payment arrangements are concerned, the Review makes clear that these should continue to benefit from the Article 60F(2) exemption.


Lindsay Lee

Senior Associate