Government acts to bring Buy-Now-Pay-Later products within the regulatory framework

19 March 2021

Following the Woolard Review (“the Review”) earlier this year, HM Treasury announced plans to bring Buy-now-pay-later (“BNPL”) credit agreements into regulation. The Government has now brought forward legislation to this effect, taking the first step to bring these products within the regulatory fold.

BNPL products

Many BNPL credit agreements rely on an exemption in Article 60(F)(2) in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). As discussed in our previous article, the Review highlighted such unregulated BNPL credit agreements. It considered that there is scope for potential customer harm, the unregulated BNPL market having more than trebled in size in 2020, and with more than one in ten customers of a major bank using BNPL already in arrears.

Regulatory oversight was recommended to ensure BNPL products develop in way that is beneficial to the consumer. Regulation will minimise harm by ensuring firms conduct proper affordability checks before lending and guaranteeing customers are treated fairly, especially vulnerable customers and those struggling with loan repayments. Customers would also be given the right to complain to the Financial Ombudsman Service, where necessary.

Proposed legislative changes

The proposed legislative changes to bring BNPL products under the remit of the FCA are contained in an amendment to the Financial Services Bill. The new Clause states:

Regulated activities and application of Consumer Credit Act 1974

(1) This section applies on or at any time after the making of an order under section 22 of the Financial Services and Markets Act 2000, after this section comes into force, which has the effect that a relevant credit activity becomes a regulated activity for the purposes of that Act.

(2) Section 107(6) of the Financial Services Act 2012 (power to make provision about the application of the Consumer Credit Act 1974) has effect as if—

(a) the reference to an order of the kind mentioned in subsection (1) of that section included an order of the kind mentioned in subsection (1) of this section, and

(b) the references to a transferred activity included a relevant credit activity which is the subject of an order of the kind mentioned in subsection (1) of this section.

(3) “Relevant credit activity” means the activity of—

(a) entering into an agreement described in article 60F(2) or (3) of the Regulated Activities Order (certain borrower-lender-supplier agreements for fixed-sum  credit or running-account credit)as lender, or

(b) exercising, or having the right to exercise, the lender’s rights and duties under such an agreement,

so far as the activity is not a transferred activity (as defined in section 107(1) of the Financial Services Act 2012).

(4) “The Regulated Activities Order” means the Financial Services and Markets Act 2000 (Regulated Activities) Order2001(S.I.2001/544) as it has effect on the passing of this Act.”

Notably, Section 107(6) of the Financial Services Act 2012 provides that the Treasury may disapply provisions of the Consumer Credit Act 1974 (“CCA”)  in relation to an activity previously licensed under the CCA, or exempted under specified provisions of the CCA, where the activity has become a regulated activity for the purposes of the Financial Services and Markets Act 2000. This amendment extends that power to certain other activities of lenders.

The approach taken does not simply make the exempt activity in 60F(2) regulated. Instead, the clause looks to create a power by Order to make amendments to the CCA to disapply CCA provisions to an activity covered by 60F(2) if there’s is a separate Order made which makes those activities a regulated activity. This averts the need for primary legislation.

It remains to be seen which CCA provisions would be removed if interest free credit was to be made a regulated activity.

Next Steps

The proposed changes are expected to pass through the legislative process without opposition. The Government will continue to consult with stakeholders to ensure the approach to regulating BNPL is proportionate.

Article co-authored by Anna Burdzy.

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