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We provide an overview of the proposed legislative changes below but in summary:
The proposed changes will mean that BNPL lending provided by third party lenders will become regulated and BNPL lenders will need to be authorised.
In good news for retailers, BNPL lending which they provide themselves will not be regulated.
As expected, there will also be an exemption for retailers who act as credit brokers.
The prescriptive pre-contractual CCA disclosure requirements will be disapplied in favour of FCA rules, on the grounds of proportionality. But the prescriptive requirements on post contractual notices will remain.
Merchants will generally need to have financial promotions approved by an authorised person. In practice, the Government’s intention is that merchants will be provided with pre-approved material from their lending partners.
Customers will benefit from connected lender liability protection and FOS rights.
Card issuers will be pleased that the Government does not propose to change the Article 60F(3) exemption (which exempts charge cards from regulation).
BNPL refers to a type of interest-free instalment credit which allows borrowers to split the cost of a purchase into instalment payments over a short period of time. To date, firms have been able to rely on Article 60F(2) of Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO) which exempts BNPL agreements from regulation. As these types of BNPL agreements are currently unregulated, firms offering them do not need to be authorised by the Financial Conduct Authority (FCA) or generally comply with the requirements of the Consumer Credit Act 1974 (the CCA).
In February 2021, and in response to concerns set out in the Woolard Review about consumer detriment, the Government announced plans to bring BNPL products into regulation. On 21 October 2021, the Government published its first consultation with the response being published on 20 June 2022 (see our previous insight: here). The current consultation confirms the Government’s position on the scope of the regulation and asks for feedback on how that will be achieved through the draft legislation.
10 key points to note
The Government wants to ensure regulation is proportionate and only covers agreements with greater potential for consumer detriment. The Government has decided that regulation will be limited to agreements that are offered by third party lenders.
So agreements will become regulated where they are borrower-lender-supplier agreements for fixed-sum credit to individuals or relevant receivers of credit which are (a) interest-free, repayable in 12 or fewer instalments within 12 months or less, (b) where the credit is provided by a person that is not the provider of goods or services which the credit agreement finances, and (c) not exempt as a result of falling within one of the exclusions. Agreements directly between merchants and their customers, such as one off in-store purchases and trade credit agreements, have been excluded from regulation. The exemption under Article 60F(3) of the RAO for certain types of interest-free running account credit (e.g. charge cards) will also be retained.
The Government will be introducing anti-avoidance measures to prevent lenders attempting to circumvent regulation by structuring agreements so that they technically become merchants for the purposes of BNPL agreements.
The consultation proposes to disapply pre-contractual requirements (such as s55 CCA and the 2010 disclosure regulations) to the agreements that are being brought into regulation. This is on the basis that a FCA rules-based regime would be a more proportionate way of dealing with the risks associated with the BNPL lending. This would mean that if firms do not provide the pre-contractual information prescribed by the CCA, the corresponding CCA sanction (that the agreement will not be enforceable without a court order) would not apply. Instead, non-compliance would be enforced by the FCA.
The existing framework says that, where a business introduces a customer to a lender with a view to the customer entering into a regulated credit agreement, the business will be undertaking the regulated activity of credit broking unless an exclusion applies. The Government acknowledges that bringing merchants into the scope of credit broking regulation would be disproportionate and could lead to them withdrawing interest-free credit options. It has drafted article 36FB in the RAO to exempt merchants who introduce their customers to agreements from this regulation.
Advertising and promotions of newly regulated agreements will fall within the financial promotion regime and will be monitored by the UK advertising bodies. Unauthorised merchants will need to have financial promotions approved by an authorised person under section 21 of Financial Services and Markets Act 2000, which can be lending partner. In practice, the Government’s intention is that merchants will be provided with pre-approved material from their lending partners.
DPS sell goods, offers or agrees to sell goods, or offers or contracts to supply services, to individuals in their homes. Due to the higher risk of pressure selling to vulnerable customers, the Government intends to require DPS to obtain FCA authorisation if they wish to offer newly regulated agreements from third party lenders. DPS will also be subject to the FCA’s full permission regime.
The small agreements provision under section 17 of CCA is to be disapplied for newly regulated agreements, meaning the full suite of CCA requirements would apply to BNPL agreements not exceeding £50.
It is anticipated that after publication of the final draft legislation, the FCA will consult on its proposed rules. To allow time for this and the new regime to be put in place, there will be a transition period under the proposed Temporary Permissions Regime (TPR). Firms can continue to operate whilst awaiting FCA authorisation as long as, pre regulation day, they already engaged in the newly regulated activity, have registered for TPR and have paid the registration fee. Lenders exiting TPR without FCA authorisation will retain permissions for lender rights and duties under Article 60B(2) of RAO only for remaining agreements.
In terms of other controls, creditworthiness assessment requirements for BNPL will be decided by the FCA, legislation will provide the prescribed form and content for newly regulated agreements, the CCA requirements for treating consumers in financially difficulties will apply and Section 75 of CCA will should apply to newly regulated agreements (without changes to the monetary thresholds).
The Government has also confirmed that newly regulated agreements should include access to FOS. However, there are concerns about the proportionality of this (i.e. the FOS case fee of £750 when compared with the amount of credit offered under the BNPL agreement). The Government will continue to engage with the FOS regarding this issue.
The Government has now clearly set out its proposed regulation of BNPL agreements and how it intends to implement this. This is an area where, ahead of regulation, the FCA has said it will continue
to monitor and has said it will make further interventions where necessary.
The Government has not yet confirmed when the draft legislation would come into force, but its ambition is to put it before Parliament during 2023, if time permits. The deadline for responding to the consultation is 11 April 2023.
The regulation of BNPL agreements forms part of wider review and reform of consumer credit and Financial Services as set out in the Edinburgh Reforms. The recent consultation on reform of the CCA also requested feedback on whether the provisions of the act should apply to small agreements and referred to the BNPL consultation.
Given the above, regulation of BNPL products is likely to be implemented and firms offering these products will therefore need to continue preparation for legislation and ensure that they engage with the consultation to ensure that the proposals are proportionate and realistic. Further, it means that BNPL lenders who are not regulated will need to register with the FCA under the TPR (when implemented) and then apply for authorisation at the appropriate time.
28 February 2023