HMT’s response to the consultation on the regulation of BNPL

The government has published its response to the consultation on the Regulation of Buy-Now-Pay-Later, that ran from 21 October 2021 to 6 January 2022. The response sets out its policy approach and intention to publish a second consultation to seek views on draft legislation by the end of the year.

Scope of regulation

The government consulted on whether regulation should be limited to BNPL providers, or whether it should capture other types of short-term interest free lending (STIFC). Both currently rely on the exemption under Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO).

The government’s proposal was that it was appropriate to make a distinction between BNPL and STIFC as there was limited evidence of consumer detriment arising from STIFC and if invoicing practices were disrupted it would severely impact day-to-day business activities.

The government set out two possible ways for a distinction to be drawn between BNPL products and STIFC and invited respondents to comment:

• Restricting the extension of regulation to interest-free credit agreements where there is a third-party lender involved and keeping arrangements directly between a merchant and a consumer exempt from regulation; or
• Defining a BNPL agreement as one where there is a pre-existing overarching relationship between the lender and consumer.

Although respondents broadly agreed that BNPL products pose a number of potential risks to consumer detriment it was noted that there is increasing similarity between the features and usage of BNPL products and STIFC. The appropriateness of a distinction continuing to be made was challenged on a number of accounts:

• Similar consumer protections should apply to similar potential risks
• Markets should be futureproofed against further developments
• Customer understanding should be enhanced, and the distinction between BNPL and STIFC create potential for confusion

In regard to its proposed distinctions, the government noted that it would be difficult to manage the potential for BNPL providers to restructure the business and fall outside the scope of regulation. It would also be difficult to define aspects of these distinctions, such as what an “overarching relationship” would include.

As a result of the responses, the government’s current view is that the scope of regulation should be expanded beyond BNPL products to capture STIFC agreements provided by third-party lenders as well, at least where they are concluded online or at a distance. This would mitigate the risk of BNPL providers restructuring to remain outside the scope of regulation and is not expected to be burdensome on third-party lenders as there are thought to be few of them and are already authorised for the provision of regulated credit agreements.

Given the difficulties with creating a distinction, the government is also considering whether it should include anti-avoidance measures in the draft legislation to enhance the regime.

What is clear, is that the government remains uncertain of how best to regulate the different businesses relying on the Art 60F(2) exemption and will continue to consider its approach. To inform its view, the government is inviting stakeholders to engage further and provide additional information by 1 August 2022.

Proportionate regulatory controls

The government is committed to building a regulatory framework that is proportionate to the potential for consumer detriment and the products in scope being useful tools for consumers to manage their finances. The consultation considered a number of specific proposals and we have set out the responses below. As a general comment, respondents used the consultation as an opportunity to make the case for broader reform of the Consumer Credit Act (CCA). The governments recognised the CCA is a dated regime and announced its intention to progress ambitious reform of the CCA and has committed to a first public consultation later this year. As this anticipated to be lengthy process, the government intends to push ahead with the regulation of BNPL and use the understanding gained from this process to inform the wider reform.

• Credit broking – unlike most regulated products, merchants do not receive a commission for brokering BNPL and STIFC agreements but pay a fee to the lender to provide the credit. Therefore, the government’s view is that it would be disproportionate to regulate BNPL and STIFC as credit broking and other measures can be used to mitigate the potential risks to consumer detriment arising from merchants.
• Advertising and promotions – most respondents agreed with the government’s proposal that the financial promotions regime should apply to increase consumer protection and provide consistency across the market. The FCA will consult on its proposals for rules on financial promotion in due course.
• Pre-contractual information – the government proposed that the CCA mandated pre-contractual information under s.55 CCA may not be appropriate for BNPL agreements and the FCA rules on pre-contract disclosure and adequate explanations may be more proportionate. Notwithstanding that many respondents disagreed with this proposal on grounds that it would create an unlevel playing field and distort competition, the government remains of the view that applying the FCA rules is more proportionate.
• Form and content – the government proposed bespoke legislation on the form and content was more proportionate as it would be tailored to suit the features of BNPL. Respondents proposed that an FCA-rules based approach may be more appropriate as it offers more flexibility, however, the government remains of the view that legislation is the appropriate tool and prescribed form and content requirements will introduce an appropriate degree of friction in the transaction to increase consumer protection. The government will engage further with stakeholders on the prescribed form and content provisions and will also consider how if a lender decides to apply the existing CCA requirements, the agreements will be compliant.
• Improper execution – under the CCA, non-compliance with the execution requirements means the agreement is unenforceable by the lender without a court order. The government considers this a good incentive for compliance and proposed to retain the improper execution provisions for BNPL and STIFC agreements. Of the respondents that disagreed with this proposal, most were BNPL providers and raised concerns around the sanction being disproportionate to what are typically low-value agreements. Nevertheless, the government’s view remains that s.61 CCA should apply to BNPL and STIFC agreements.
• Creditworthiness and credit files – almost all respondents agreed that the FCA’s rules on creditworthiness should apply and that BNPL should be reported on credit files to mitigate consumer detriment. The government considers it appropriate for the FCA to consider whether the current rules need tailoring for BNPL and STIFC products and is engaging with credit reference agencies as they develop their approach to reporting BNPL on credit files.
• Arrears, default and forbearance – the majority of respondents supported a consistent application of the FCA’s rules requiring firms to treat customers in default or in financial difficulties fairly and with forbearance and due consideration, taking into account the circumstances of each individual borrower. Respondents also supported the application of the CCA provisions although BNPL providers generally considered the CCA regime to be disproportionate given the low level of risk and low value of such agreements. The government’s response is that the FCA rules should apply and provide a trigger for consumers to engage with their lender and signal that forbearance may be required. In regard to the CCA, the government recognises that tailored provisions may be appropriate, particularly around timing given the short-term natured of BNPL products and will consider this further as it drafts the regulations.
• Section 75 CCA – as s.75 CCA is well established and often relied upon by consumers, the government proposed that it was appropriate for it to apply to BNPL. Respondents were generally supportive of this proposal, with some advocating for an entirely FCA-rules based regime. Following the consultation, the government’s view remains that s.75 offers a strong and well-known consumer protection. The monetary threshold will mean that certain BNPL agreements fall outside s.75 CCA but this is consistent with the current position for regulated credit products.
• Small agreements – the government intends to disapply s.17 CCA which excludes agreements below £50, to BNPL and STIFC agreements. This is considered to be appropriate as many BNPL agreements are for a value below £50. It is possible this will create inconsistency with interest-bearing agreements that are below £50 that can rely on s.17 CCA, however, the government anticipates that lenders will implement standardised systems and processes for credit agreements and intends to monitor the position.
• FOS jurisdiction – the government intends to bring BNPL and STIFC agreements within the FOS jurisdiction and respondents broadly agreed with this proposal as consumes should have access to appropriate dispute resolution mechanisms. However, the FOS case fee of £750 is high in comparison to a typical BNPL transaction, therefore the government will engage with the FOS to consider the potential for disproportionality here.

Conclusion

Although the scope of the regulation remains uncertain, the response is helpful and sets out the parts of the CCA which will apply to BNPL without tailoring. These won’t be universally well received but should help to raise standards and enhance the protection afforded to consumers.

If you would like to discuss the impact of the current proposals on your business in more detail, please get in touch.