Buy-now-pay-later: government’s response to the consultation

On 20 June 2022, the government published its response to the consultation on the regulation of interest-free buy-now-pay-later lending (BNPL). In summary, the government has confirmed its intention to regulate interest-free BNPL products which currently benefit from the Article 60(F)(2) exemption.

The proposed scope of regulation will be wider than originally proposed: it will also capture short-term interest-free credit (STIFC) when it is provided by third party lenders. The government is also minded to extend the scope to cover STIFC provided directly by merchants where it’s offered online or at a distance, but it intends to consult further on this. Comments from stakeholders are invited by 1 August 2022.

Background

Providers of interest-free BNPL can currently benefit from the Article 60(F)(2) exemption which means that this form of credit agreement is not regulated under the Consumer Credit Act 1974 (CCA). In order for the Article 60(F)(2) exemption to apply, the agreement must be a borrower-lender-supplier agreement for fixed-sum credit, the number of payments to be made by the borrower must be 12 or less, those payments are required to be made within a period of 12 months or less, and the credit must be interest and charge free.

The government’s latest response follows on from the Woolard Review in February 2021 and the government’s subsequent consultation on the regulation of non-regulated BNPL in October 2021. In summary, the government had confirmed that it was committed to introducing balanced and proportionate regulation of BNPL. In our previous article on the consultation, we outlined the proposals in more detail. In the rest of this article, we summarise the key points of interest and what has changed.

Proposed regulation

Overview

After receiving 86 responses to its consultation, the government has set out details of its proposed regulation of the BNPL and STIFC market. In making these proposals, care has been taken to balance the need to protect against consumer detriment against disproportionate regulation, which would be prohibitive, particularly given the relatively low value of most BNPL transactions.

The industry will generally welcome the government’s confirmation that the other product uses of the Article 60(F)(2) and (3) exemptions will continue to apply – such as invoicing, trade credit, charge cards, interest-free agreements which finance insurance contracts and employer/employee lending.

Key points

In our previous article, we summarised the government’s thinking about the regulatory controls it intended to introduce and which parts of the CCA would be disapplied. The government’s response to the consultation confirms that it intends to implement these regulatory controls as proposed (i.e. by disapplying certain CCA requirements and applying certain provisions of the FCA’s handbook). Of particular note, this means:

  • Credit broking: merchants will be exempt from FCA regulation as credit brokers (with limited exceptions, such as for domestic premise suppliers).
  • Creditworthiness assessments: as one of the key concerns raised in the Woolard Review, the government confirms that the FCA’s rules under CONC 5.2A will 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. It considers that clear, consistent and timely credit reporting across the three main agencies is important.
  • Customers in financial difficulties: the FCA rules on the treatment of customers in default or arrears and the CCA requirements will apply to BNPL and STIFC agreements. The government recognises there are challenges with the timing requirements of post-contractual information and that this may need to be tailored for BNPL and STIFC agreements given their (often) very-short term nature.
  • Section 75 CCA: this consumer protection will apply. But the government recognises that some BNPL transactions will fall outside the current monetary thresholds and that some business models may break the debtor-creditor-supplier relationship.
  • FOS jurisdiction: customers will have the right to complain to the Ombudsman Service. The government acknowledges stakeholders’ concerns about the potential disproportionality of the FOS case fee for BNPL agreements. But it regards this as a matter for the FOS to consider.

For a summary of the other proposals, see our earlier article.

Extension to cover STIFC

In the original consultation, the government drew a distinction between interest-free BNPL and STIFC. The initial proposal was to only regulate BNPL. However, after considering industry feedback, the government now proposes to extend the scope of the regulation to also cover STIFC. This is because of the increasing similarities between these products and the blurring of the line between their definitions. As such, there is a need for consumer protection.

The proposed regulations are intended to apply to BNPL and STIFC when the credit is provided by third party lenders. If the credit is offered by the merchant directly it will not be covered. This is because the government had “limited sight of the scale and nature of the merchant-provided STIFC market” and there was therefore uncertainty as to the potential number of merchants that could be caught and the impact that may have. In addition, the government noted that STIFC being provided by a merchant directly in-person-in-store carries less risk than other agreements and therefore including them in the regulation would not be proportionate. However, the government will consider the extent to which the regulation should cover STIFC provided by merchants online or at a distance.

How does this interact with wider reform of the CCA?

The regulation of BNPL and STIFC lending is only part of the wider reform of the CCA that the government has recently announced. This will be a longer-term exercise given the complexities of the CCA and the wide range of credit agreements to which it applies.

Although this wider change is coming, the government does not want to wait to implement protections for consumers using BNPL credit and therefore the proposals will be implemented before any new legislation to replace the CCA.

Next steps

There are several areas where the government continues to consult, such as the inclusion of merchant provided STIFC, the form and content of BNPL and STIFC agreements, requirements for default and dealing with customers in financial difficulty. The government has invited stakeholders to comment by 1 August 2022.

Following this, the government is expected to publish and consult on draft legislation to implement the proposals, with secondary legislation anticipated to be made mid-2023. The government and the FCA will continue working closely on the drafting and implementation of these protections for consumers and allowing those affected to acclimatise to the regulations that will be implemented.

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