Buy Now Pay Later - UK publishes consultation and draft legislation

On 14 February 2023, the UK Government (the Government), published its consultation on the regulation of Buy-Now-Pay-Later (BNPL) which includes draft legislation (the Consultation).

This follows a previous consultation (published on 21 October 2021) which sets out how proportionality would be achieved when regulating BNPL services. In a response published on 20 June 2022, the Government confirmed the scope of regulation would capture BNPL as well as Short Term Interest Free Credit (STIFC). In particular, the Government stated that it intended to extend the scope of regulation to capture BNPL and STIFC services which currently benefit from the exemption under Article 60F of the Financial Services and Markets Act (Regulated Activities) Order 2001 (RAO).

Responses to the consultation must be submitted on 11 April 2023.

Following the Consultation, the Government plans to lay legislation before Parliament during 2023. The Government intends to introduce a “temporary permissions regime” (not to be confused with the regime of the same name which applies in relation to EEA firms previously passporting into the UK), which will allow BNPL firms to continue carrying on business whilst applying for a full FCA authorisation.

Background

The UK will be one of the first countries to specifically regulate BNPL lenders. The Woolard review highlighted the large potential for consumer harm from BNPL services and highlighted the urgency to introduce regulation in this largely unregulated area. On 9 December 2022, the Government announced longer term plans to reform the whole Consumer Credit Act 1974 (CCA), but as the reform of CCA will be lengthy and given the harms identified in the Woolard review the Government decided to consult separately on the regulation of BNPL.

Currently many firms providing interest free delayed payment methods benefit from the exemption found under Article 60F of the RAO (the 60F Exemption), which generally exempts from the scope of regulation agreements where no interest is charged and where there are 12 or fewer instalments in as many months. Firms providing BNPL products benefitting from the 60F Exemption do not have to be FCA authorised (but see below as to the financial promotions exemption) and the agreements do not need to be in a prescribed form under the CCA.

We’ve previously explored how Buy Now Pay Later works, how it is currently regulated in the UK and the impact of impending regulation and What’s next for Buy Now Pay Later: HM Treasury launches consultation.

What is BNPL and STIFC?

As noted above, the Consultation has indicated that it intends to regulate BNPL and STIFC. These are industry terms which do not have a specific legislative meaning, but the Government has distinguished between BNPL and STIFC as follows:

• BNPL - usually taken out online with consumers often having an overarching relationship with a third-party lender, under which multiple low value agreements are made, with little transactional friction as a result.
• STIFC - frequently offered in-store, with consumers taking out a single, higher-value discrete agreement with the credit provider, who may be a third-party lender or the merchant itself. This is a more traditional form of credit, which has operated for many years without raising significant concerns of consumer detriment.

In this article, we will focus on BNPL but the changes are equally applicable to STIFC and the legislation does not distinguish between them.

1. Changes to the scope of consumer credit regulation

The Consultation is asking for stakeholder feedback on draft legislation which has been published in the Consultation which will be subject to Parliamentary approval. The key legislation which will be amended is as follows:

• the RAO;
• the CCA; and
• the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO).

The table provides an overview of how BNPL/STIFC providers and brokering merchants may be impacted by the proposals – further detail can be found below.

Merchant-provided credit and third-party lenders

As part of the Consultation, the Government has determined that the risks posed by BNPL (involving third-party lenders) is higher than the risks which are posed by Merchant-Provided Credit. Accordingly, the intention of the Government is that BNPL credit provided by third-party lenders will be regulated whereas Merchant-Provided Credit will not be.

For BNPL providers, this means that the scope of the 60F Exemption will be narrowed so that such providers cannot rely upon the exemption. The proposed amendments to the 60F Exemption state that the exemption cannot be relied upon if the agreement falls within the new paragraph (7A). Broadly, a credit agreement will fall within paragraph 7A if (a) the supplier (the merchant) and the lender (the BNPL provider) are not the same person and (b) the credit agreement does not fall into a very limited category of credit agreements (for example, financing for premiums of contracts of insurance will continue to be exempt provided that the other conditions of the 60F Exemption are satisfied). There is also an anti-avoidance provision which states that an agreement will fall within the new (7A) paragraph if the merchant sells the goods to the lender and the lender then supplies the goods to the customer.

For Merchant-Provided Credit, the new paragraph (7A) will not apply because the merchant is both the supplier of the goods and the lender. Accordingly, merchants should be able to continue to rely upon the 60F Exemption if the existing conditions of the 60F Exemption are satisfied (in particular, there is no interest and there are 12 or less instalments in as many months).

Credit broking

Currently, merchants who introduce their customers to BNPL lenders are exempt from regulation provided that the credit agreement (which BNPL providers will enter into with the merchant’s customers) satisfies the requirements of the 60F Exemption.

The Government considers that it would be disproportionate to regulate merchants who are introducing their customers to BNPL providers and so broadly intends to maintain the status quo. This means that merchants who introduce their customers to BNPL providers (who, as noted above, will now need to be authorised by the FCA) will not be carrying on regulated credit broking. There is, however, an exception to this for “domestic premises suppliers” which captures merchants engaging in doorstop selling (and such merchants are likely to require authorisation for credit-broking). It is currently unclear whether merchants will be able to rely upon this exemption if the BNPL agreement charges interest.

2. Financial promotions

The Financial Promotions regime requirements are currently applicable to lenders and merchants who promote credit agreements (including BNPL credit). However, there is an exemption under the FPO which allows merchants to promote credit provided by authorised lenders. As part of the Consultation, the Government has disapplied this exemption so that it does not apply to promotions of BNPL credit – thus merchants will be subject to the Financial Promotions regime when promoting BNPL credit even though the BNPL provider will need to be authorised by the FCA.

The implication of this is that merchants will need to have their promotions concerning BNPL approved by the BNPL provider. In practice, the Government expects BNPL providers to provide pre-approved materials to merchants as part of the overarching commercial arrangements between the lender and merchant.

The Consultation does not appear to address the position of merchants promoting their own credit and so the position in this respect seems to be unchanged.

Authorised firms approving financial promotions for unauthorised persons will soon need to apply for permission via a new FCA Gateway – See our latest insight on The New FCA Gateway for Firms who Approve Financial Promotions

3. Implications under the CCA

Given that BNPL agreements can no longer fall within 60F Exemption, such agreements will become regulated credit agreements. Not only does this have implications for the regulatory status of the BNPL provider (as noted above) but it also has implications with respect to the requirements arising under the CCA.

The general rule is that all of the provisions under the CCA will now apply to BNPL agreements. Furthermore, the Government intends to exclude BNPL agreements from the definition of “small agreements” (agreements for credit not exceeding £50 are not subject to many of the provisions under the CCA) so even very low value BNPL agreements will be subject to the requirements of the CCA.

This means that:

• the form and content requirements under the CCA will apply to BNPL agreements;
• the requirements in the CCA in relation to service of notices will apply to BNPL agreements (for example, annual notices and notices of default);
• section 75 of the CCA (under which lenders are liable for a supplier’s failure to supply goods and services) will apply to BNPL agreements.

However, the Government has stated that it intends to disapply the pre-contractual information provisions of the CCA. The Government has stated that the application of specific pre-contractual rules imposed by the FCA (in the Consumer Credit Sourcebook) would be more appropriate.

In regard to Creditworthiness checks the Woolard Review highlighted that affordability checks are often not caried out by BNPL providers and could result in consumers entering short-term loans which they are then unable to repay.

The previous consultation asked whether there should be specific creditworthiness assessments for BNPL agreements, with the majority of respondents agreed that BNPL services should conduct creditworthiness assessments. The Government considers it proportionate to bring BNPL products into the application of the FCA’s creditworthiness assessments. Furthermore, the timely credit reporting across the main credit reference agencies should be part of the provision of services of BNPL services.

The Government’s view is that the FCA should decide if the rules on creditworthiness are to be tailored to new regulated BNPL agreements. In parallel to the Consultation, on 9 December 2022 the “Edinburgh Reforms” (the reforms) were announced. The reforms introduce over 30 regulatory including the reform of the Credit Act 1974, the consultation only focuses on disapplying the section 17 of the CCA to BNPL agreements when they are brought into regulation and asks respondents for an assessment of the possible impact of section 17 not applying. The consultation on the reforms closes on 17 March 2023[1].

4. Temporary Permissions Regime (TPR)

BNPL providers which are not currently authorised (because they rely upon the 60F Exemption) and who wish to undertake regulated activities on or after the date that the new regulations come into force will need to register with the FCA for entry to the TPR before regulation day. The TPR will allow firms to continue to operate without disruption until they are fully authorised by the FCA to undertake newly regulated activities. Without entry into the TPR a firm will have to suspend its operations and complete the FCA authorisation process (although activities in respect of agreements entered into before the regulations come into force will continue to be exempt).

Under the TPR, firms will be deemed authorised under part 4A of FSMA and will be allowed to enter into the newly regulated agreements and will need to comply with the relevant FCA rules. The FCA will therefore have the power to supervise firms under the TPR and take enforcement action if necessary. The relevant regulated activities will be:

• entering into a regulated credit agreement as lender;
• exercising, or having the right to exercise, the lender's rights and duties under a regulated credit agreement;
• credit broking (for domestic premises supplier merchants that offer newly regulated agreements).

The following firms will be eligible to apply for registration in the TPR in order to undertake newly regulated activities:

1. Third-party lenders offering currently-exempt agreements, who do not currently have the appropriate FCA authorisation for lending;
2. Any third-party lender which has an arrangement with a merchant under which the merchant agrees to sell the goods to the lender at the point when the newly regulated agreement is taken out, where that lender does not have a permission for regulated consumer credit lending;
3. Domestic premises suppliers that currently only broker currently exempt agreements and who therefore do not already have a full credit broking permission.”

Registration to the TPR

Firms will be required to provide the FCA with a certain amount of information upon registration, and that firms will have to pay a non-refundable fee. A window for registration will be provided in a new consultation.

Next steps

• The Government is developing an impact assessment using information provided to the previous consultation and other stakeholder engagement, in addition to an Equalities Impacts assessment yet to be carried out.
• The FCA to consult and undertake a cost benefit analysis.
• Shortly following the publication of the Government's response to this consultation with final draft legislation, the FCA are expected to publish two consultations on; proposed conduct rules for firms which provide agreements, and as rules for firms operating on a temporary permission.

The FCA will consult on how the TPR may work in practice.

Our Financial Services Regulatory team will be monitoring next steps and shall keep you up-to-speed with the latest developments.

Co-authors

Gavin Punia, Finance & Financial Regulation Partner, London, gavin.punia@twobirds.com
Thomas Hepplewhite, Finance & Financial Regulation Associate, London, tom.hepplewhite@twobirds.com
Melissa Daley, Knowledge Manager, London, melissa.daley@twobirds.com

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[1] CCA_CP_211122_Final_Review.pdf (publishing.service.gov.uk)