HM Treasury has published the highly anticipated consultation paper (“CP”) setting out policy options to achieve a proportionate approach to regulation of buy-now-pay-later (“BNPL”) products.
Earlier this year, HM Treasury announced its intention to bring interest-free BNPL products within the FCA’s perimeter after the Woolard Review highlighted the probable risk of consumer detriment. The CP intends to ensure that the scope of the new regulations is defined as closely as possible to target products where there is potential for consumer harm and seeks views on a range of regulatory controls that could be put in place for BNPL. Such controls include:
1. Credit Broking
Brokers of BNPL products and other short term interest free agreements are not currently “credit broking” because broking such agreements is not within the regulatory perimeter. This could change if BNPL became regulated. This could impose significant burdens on merchants.
Any regulation of BNPL could be accompanied by an exemption to ensure merchants broking BNPL would not lead to the merchant having to be authorised by the FCA as a credit broker.
It might be necessary for some exceptions to apply to any general exemption, for example where merchants sell goods or services in customer’s homes.
2. Financial Promotions
Any promotions of BNPL agreements will fall within the financial promotions regime. The Government is looking to amend the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 to this effect.
Merchants would need approval for BNPL promotions from an authorised person to try and reduce consumer detriment from merchants not themselves being regulated.
3. Pre-contractual information
The Government proposes that firms need only comply with FCA rules, permitting section 55 (disclosure of information) of the Consumer Credit Act 2974 (“CCA”) to be disapplied. This is because section 55 contains detailed and inflexible requirements which are not appropriate to BNPL agreements as i) the interest free products are lower-risk, ii) BNPL products are significantly smaller in size and duration than regulated consumer credit products, and iii) BNPL agreements are likely to be entered into online and with much greater frequency so there is a high risk that the customer will not engage with long and detailed information disclosures.
4. Credit Agreements
Mainstream consumer credit regulations are considered inappropriate for BNPL agreements. Bespoke legislation may be necessary on the form and content requirements for BNPL to better suit the features of the product and how it is used by consumers in practice.
5. Creditworthiness assessments and consumers in financial difficulty
There is currently no requirement to carry out creditworthiness assessments for new customers entering into BNPL agreements. This was a key concern raised in the Woolard Review.
The FCA’s rules on creditworthiness should be applied to BNPL agreements, with the FCA to tailor to BNPL if necessary. Further, the Government intends to include requirements around how firms treat customers in financial difficulty, such as customers in arrears receiving notices and notice periods.
6. Small Agreements
Small agreements are defined in section 17 of the CCA as regulated agreements for credit not exceeding £50, other than a hire-purchase or conditional sale agreements. Some parts of the CCA do not apply to small agreements which is why the Government is consulting on narrowing the scope of section 17 to ensure CCA requirements apply to BNPL agreements under £50. This is because many BNPL agreements are for less than £50.
FOS would have applicability and therefore provide recourse to BNPL customers.
Section 75 of the CCA (liability of creditor for breaches by supplier) should apply.
Section 61 (signing of agreement) and 65 (consequences of improper execution) of the CCA could be a valuable element of a future BNPL regulatory framework. They provide strong incentives to lenders to provide the necessary information to a consumer or risk the agreement becoming unenforceable. It would mean more friction in the transaction, which could be useful by giving customers the opportunity to consider whether the credit agreement they are entering meets their needs.
It is hoped that with the new regulatory regime, consumers will better understand what they are signing up to by receiving clear information about the product and time to consider whether it is suitable and affordable.
Responses are invited by 6 January 2022.