Payment developments

The Government has published its long-awaited consultation on the regulation of buy-now pay-later (BNPL), following the Woolard Review earlier this year. In summary, the Government says it is committed to introducing balanced and proportionate regulation of BNPL. The consultation, which is open until 6 January 2022, seeks views to inform final decisions about how that regulation should take shape.

Introduction

We summarise below the key points identified in the BNPL consultation.  We then provide our views from a wider payments and consumer protection perspective in light of the wider developments in the payments space.

One headline point is the suggestion that connected lender liability should be included in BNPL regulation – as currently provided under section 75 (Section 75) of the Consumer Credit Act 1974 (CCA) for debtor-creditor-supplier agreements.

In a busy month for payments news:

• the Government also published its Response to the Call for Evidence regarding its Payments Landscape Review (Payments Landscape Response); and
• the Payment Systems Regulator (PSR) published the outcome of its review of consumer protections in interbank payments (see our article here).

BNPL regulation: the proposals in summary

The consultation explores two parameters: 1) the scope of BNPL regulation, and 2) proportionate regulatory controls for BNPL. The overarching theme is that the Government intends to introduce proportionate legislation that minimises the risk of the regulatory impact being extended unintentionally.

The scope of BNPL regulation

BNPL agreements currently fall within the exemption under Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). As a result, they are not regulated credit agreements under the CCA. Other forms of short-term interest free credit also fall within this exemption (such as interest free instalment loans repayable within a year – which may finance the purchase of more expensive goods or allow for payment of club memberships or season tickets over a year).

The Government acknowledges that, whilst such other forms of short-term interest free credit potentially share some of the same potential consumer detriments as BNPL, they do not share all of the same risks as BNPL. As a result, and subject to further evidence, it is minded to keep such credit agreements outside the new regulatory sphere.

The consultation acknowledges that there is a balance to be struck in how it effectively introduces this change. If the line is drawn too widely, it may catch these other forms of currently exempt agreements. But if is drawn too narrowly, the BNPL product could be easily tweaked to become more like a running-account credit (and may then benefit from the exemption under Article 60F(3)of the RAO). Views are invited on these issues.

Proportionate regulatory controls for BNPL

In outline, the Government’s present thinking is as follows:

• Credit broking by merchants: merchants are unlikely to need to become authorised as credit brokers. The Government recognises that this would have a significant cost for retailers – and would likely disproportionately impact on small and medium businesses. Its concern is that this may lead to merchants dropping BNPL as a payment option, thereby reducing consumer choice.
• Advertising and promotions: BNPL agreements are already subject to regulations for advertising as set out by the UK Advertising Codes, overseen by the Advertising Standards Authority, and subject to the Consumer Protection from Unfair Trading Regulations 2008. But it is likely that promotion of BNPL agreements will also be brought within the FCA’s rules on financial promotions (such that communications will need to be ‘clear, fair and not misleading’, amongst other things).
• Pre-contractual information: it is likely that the FCA’s rules on pre-contract disclosure and adequate explanations under CONC 4.2 will apply. But the less flexible requirements for information disclosure under section 55 of the CCA should not apply.
• Credit agreement form and content: the consultation envisages that bespoke legislation may need to be developed on this (i.e. rather than the requirement to comply with section 60 of the CCA and the regulations made under that section).
• Unenforceability for improperly executed agreements: the Government’s view is that sections 61 and 65 of the CCA should apply to BNPL agreement. This is because they act as a strong incentive to creditors to ensure that the necessary information is provided to consumers. Otherwise, credit agreements will be unenforceable without a court order.
• Creditworthiness assessments: as one of the key concerns raised in the Woolard Review, the consultation proposes that the FCA’s rules under CONC 5.2A should apply. The Government also intends to work with Credit Reference Agencies and others to reach agreement on how BNPL should be reported on consumers’ credit files.
• Customers in financial difficulties: the Government’s view is that it is likely to be appropriate for some of the FCA’s rules to apply as to how firms treat customers in financial difficulties but some adaptions may be necessary. The consultation also suggests that the requirements for CCA statutory notices would help to address the concern over the inconsistent treatment of customers in financial difficulty (a key concern identified in the Woolard Review). But the consultation invites views on this.
• Section 75: although some BNPL providers offer purchaser protection, the Government suggests that a statutory protection could apply.
• Small agreements: the Government’s view is that the definition of a small agreement may need to be narrowed as part of this exercise. Some parts of the CCA do not apply to small agreements; they are defined under section 17 of the CCA as a regulated consumer credit agreement for credit not exceeding £50 (except for hire-purchase or conditional sale agreements). Many BNPL agreements would otherwise fall within scope of being a small agreement.
• FOS redress: the consultation proposes that customers should be able to refer complaints to the Financial Ombudsman Service (the FOS) and seek redress.

Comment on purchaser protection and alternative forms of payments

The consultation acknowledges that the average BNPL agreement is for £65 - £75. Therefore, a significant number of transactions will fall below the current £100 lower financial threshold for Section 75 to apply. We will need to await the detail to understand how the Government proposes to deal with this.

If Section 75 (or similar) protection is extended to all BNPL agreements, this may act as a further incentive for consumers to use BNPL as a form of payment. It may also provide customers with greater protection than other emerging forms of retail payments. For example, with interbank payments (which remain nascent in the retail space), there is currently no equivalent form of purchaser protection.

As outlined in our article on the PSR’s review of consumer protections in interbank payments, the PSR has opted not to intervene at this stage – preferring a market-driven approach to ensure consumers are effectively protected. But the PSR and the Government both recognise that greater protection for consumers when making purchases via Faster Payments is needed.

Unlocking Open Banking to allow consumers to pay for goods and services in shops and online via their accounts remains a priority area for the Government, regulators and the Industry – as reiterated in the Payments Landscape Response: the Government wants greater competition and choice between payments networks – beyond the use of credit and debit cards.

As also outlined in the Payments Landscape Response, the Government’s view is that Faster Payments rules addressing reimbursement and liability on all scheme participants will need to be introduced, alongside other measures, to address the growing issue of authorised push payment scams.

Of course, such greater protection comes with an increased cost to the provision of these alternative forms of payment. The economics of these steps must be carefully considered – in the regulation and rules governing both BNPL and Faster Payment – and balanced against the need to ensure there is consumer trust in these payment models.

Comment: final remarks

The use of BNPL by consumers has grown exponentially over the last 18 months. Appropriate and proportionate regulation is overdue and the provisional views expressed in the consultation are generally likely to be welcomed by the retail and financial services industries. We will, of course, need to await the detail following the closing of the consultation to assess how the new regulation will look in practice.

With the likely application of creditworthiness assessments, and the proposed referral rights to the FOS, BNPL providers will need to ensure their systems and processes are designed to address the obligations under CONC.  Otherwise, they may find themselves on the end of a number of irresponsible lending complaints.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions