The consultation was preceded by an announcement from the government in February 2021, indicating that it wanted to bring unregulated interest-free BNPL products within the scope of regulation given the potential risk of consumer detriment highlighted in the Woolard Review. The HM Treasury consultation focused on scope (identifying and defining precisely which types of credit agreement should come within the regulatory perimeter) and controls (what regulatory controls should be imposed on the credit agreements that newly fall into the scope of regulation).
The key messages for the BNPL sector are that:
- draft legislation (and a further consultation) to regulate the sector should arrive by the end of the year, with the relevant legislation expected to be made next summer;
- the distinction between BNPL and short-term interest free credit (STIFC) made in HM Treasury’s first consultation has been re-evaluated, so that third party providers of both BNPL and STIFC will be brought into regulation. Merchants providing STIFC themselves could remain outside scope, unless the product is provided online or at a distance (and may therefore present similar risks to BNPL);
- merchants will remain outside scope of regulation as credit brokers;
- the financial promotions regime is to apply in full to all BNPL and STIFC agreements, where promotions are made by merchants;
- on the sensitive question of the FOS jurisdiction, HM Treasury has opted to maintain its proposal that consumers should have the ability to refer their complaint for products to the Financial Ombudsman (FOS). This was a key source of concern for certain providers, given the costs of the FOS relative to the typical sums lent under BNPL agreements;
- some existing CCA requirements will be tailored (using recently acquired powers for HM Treasury), so as to deliver a more proportionate framework. Interestingly, HM Treasury will make secondary legislation under the CCA 1974 to prescribe particular form and content for to-be regulated BNPL (and third party lender STIFC) agreements; even though the reform to the CCA 1974 itself is likely to see these requirements eventually move to the FCA Handbook. The nature of the new requirements, their suitability for digital media and the extent to which they address perceived, potential consumer detriment will be key to the overall calibration of the new regime in practice; and
- BNPL agreements will be in-scope of s.75, CCA; marking a significant extension of consumer rights.
More detail is set out below.
In its response the government proposes to expand the scope of regulation from that consulted on, so that the regulatory perimeter not only captures BNPL products but also STIFC products when they are provided by third-party lenders. One of the reasons for this extension in scope is the increasing similarities in the key features and real-world usage of BNPL and STIFC demonstrating the need for consistent protections to be offered for products with the potential to be offered alongside each other.
The government is also minded to extend the scope of regulation to capture STIFC agreements which are provided directly by merchants online or at a distance, given their potential to present the same risks as BNPL agreements and STIFC agreements provided by a third-party lender. To enable a final decision to be made on the inclusion of merchant-provided STIF, provided online or at a distance, the government is seeking further stakeholder input on both scale (including the potential number of merchants providing STIFC themselves, both in-person or online or at a distance, and the types of sectors they operate in) and operation (including the way in which merchants administer and manage the provision of STIFC) by 1 August 2022.
Anti-avoidance and exemptions
In terms of anti-avoidance measures, the government is still concerned about BNPL providers adopting a running-account model and utilising the ‘article 60F(3) exemption’ in order to circumvent regulation, while still offering products that present the same potential consumer harm as BNPL. In light of this, the government will be considering whether legislative change is needed in relation to this exemption so that BNPL providers cannot take advantage of it. The government notes that providers of charge cards currently make use of this exemption, but intends to keep these products exempt.
The government notes that the consultation responses confirmed that certain arrangements falling within the article 60F(2) and 60F(3) exemptions do not present a substantive risk of consumer detriment and therefore is proposing the following types of arrangement to continue to be exempt: invoicing, interest-free agreements which finance contracts of insurance, charge cards, trade credit and employer/employee lending (although this may continue to be covered by provisions of Article 60G, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 in any event).
The government also intends to exempt merchants offering agreements which are brought into regulation as a payment option from credit broking regulation.
In relation to advertising, the government keeps to its consultation view that, the financial promotions regime should apply to merchants offering BNPL and STIFC products as payment options. Given this, the FCA will be consulting on proposals for rules on financial promotions for BNPL and STIFC agreements in due course. Similarly, the government remains of the view that the Consumer Credit Act 1974 (CCA) pre-contractual provisions should be dis-applied and replaced with FCA rules for article 60F(2) agreements brought within the scope of regulation. The government will be considering how such agreements will be compliant and properly executed should a lender choose to apply the existing CCA requirements for currently-regulated agreements to the article 60F(2) agreements which will be brought into regulation.
In terms of the form and content of agreements, the government remains of the view that these should be prescribed in legislation but that there should be a tailored approach. The government therefore intends to further engage with stakeholders and prescribe the form and content of BNPL and STIFC agreements in secondary legislation made under the CCA.
The section 61 CCA requirements on improper execution will be applied in relation to BNPL and STIFC agreements that are brought into regulation.
Arrears, default and forbearance
The CCA requirements on the treatment of consumers in financial difficulty will be applied to BNPL and STIFC agreements that are brought within the regulatory perimeter. The government is mindful that the CCA requirements on post-contractual information may need some amending and will give further thought to this when it issues draft regulations. The FCA will consult on proposed rules on arrears, default and forbearance for BNPL and STIFC agreements in due course.
The consumer protection measure in section 75 of the CCA will be applied to BNPL in line with other regulated credit agreements subject to the current monetary threshold.
As mentioned above, the government is seeking stakeholder feedback on bringing within the scope of regulation STIFC products provided directly by merchants online or at a distance. The deadline for responses is 1 August 2022.
The government also aims to publish a second consultation to seek views on the detail of draft legislation by the end of the year.
Following the second consultation, the government aims to lay secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime.