Buy-Now-Pay-Later: key points from the consultation on draft legislation

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.