HM Treasury has now (20 June 2022) published its response to its consultation paper on the regulation of interest-free buy-it-now (“BNPL”) credit products.
As a reminder, the government announced last year its intention to bring BNPL credit into the regulatory scope. Currently, many BNPL credit products fall under an exemption for interest-free short-term credit products – meaning that providers of such products do not need FCA authorisation, and the regulatory rules of the FCA do not apply. In addition, most of the provisions of the Consumer Credit Act 1974 (“ACC”) do not currently apply to BNPL products that rely on the exemption.
The response document contains the following key points:
- Extension of the regulatory scope to BNPL and STIFC products. The government only intended to extend the regulatory scope to include BNPL agreements (for example, agreements that are typically made online with consumers who have an overall relationship with a third-party lender). However, after taking into account the responses to the consultation, the government also intends to regulate other interest-free short-term agreements (“STIFC”) (e.g. credit products frequently offered in-store, consumers entering into a single discrete agreement of higher value with a credit provider). This is despite the government acknowledging that the STIFC credit has operated for many years without raising significant concerns. The response indicates that the regulations should cover STIFC products when provided by third party lenders, and the government is also willing to extend the scope of the regulations to encompass STIFC products offered directly by merchants, online or remotely. . HM Treasury has asked for comments on the proposal to include STIFC products offered by traders by 1 August 2022. He says comments are particularly welcome in relation to sectors where responses to date indicate that such credit can be offered, such as: dentistry, health care, sports clubs, vehicle repairers and potentially SME traders.
- The exemptions for certain short-term loans remain. HM Treasury says that although they intend to include BNPL and STIFC credit, they do not want to remove exemptions for other types of short-term credit products, including: billing, free interest that finance insurance contracts, credit cards, trade credit and employer/employee loans.
- Exemption for merchants intermediating in BNPL/STIFC credit. The government intends to exempt merchants offering BNPL/STIFC agreements that are put into regulation as a payment option from credit brokerage regulations. This will be extremely welcomed by merchants who partner with third-party lenders to offer alternative payment options to their customers. The government felt there was minimal risk of merchants pushing consumers into unsuitable credit products – as merchants generally do not receive a commission for brokering these types of products.
- Financial promotion scheme to be extended. The government intends to change the financial promotions regime so that all promotions from BNPL agreements fall under the financial promotions regime (we note that many promotions are already captured). This means that traders (who are not licensed themselves) will need to obtain approval for BNPL/STIFC agreement promotions from an authorized person (who could be the lending partner).
- FCA rules to define the pre-contractual information that will apply. CLA rules on the form and content of agreements will apply. BNPL and STIFC credit products included in the scope will not be subject to the pre-contractual information requirements contained in the CSF, however, they will be subject to the pre-contractual information requirements to be implemented by AFD. The provisions contained in the CSF on the form and content of agreements will apply to BNPL and STIFC credit products, but more importantly, the government intends to adapt these requirements (through secondary legislation ) to make them more proportionate given the lower risk involved in BNPL credit and the way they are generally used.
- The improper execution provisions of the CCA will apply. The government intends to apply the abusive execution provisions of the CCA in the same way as it does for other regulated credit agreements. This would mean that a BNPL/STIFC agreement would become unenforceable without a court order if the agreement was not in the prescribed form, contained the prescribed content and was signed in the prescribed manner.
- Solvency rules will apply. BNPL and STIFC products will be subject to the current FCA rules on credit ratings and it will be up to the FCA to decide whether the rules need to be adapted.
- Strict CCA rules on arrears and defaults will apply. The CCA contains requirements (including certain notices that must be sent to the borrower) in the event that the borrower is late/defaults on the loan. The government intends to apply these requirements to BNPL and STIFC products, but recognizes that some of the rules may need to be adapted given the short-term nature of the products.
- Section 75 protection will attach to BNPL/STIFC agreements. As a general rule, Article 75 of the CCA will apply to BNPL and STIFC products. Generally speaking, Section 75 provides that if the borrower has a valid claim against the supplier for misrepresentation or breach of contract, the borrower has a similar claim against the lender, who is jointly and severally liable with the supplier. For example, prima facie, if a BNPL or STIFC product was used to purchase a television from a store (and the credit was provided by a third party) and the television was faulty, then the buyer would also have a claim against the lender (which could be useful, for example, if the store had become insolvent).
- Provisions of the small agreements not to apply. The CCA does not apply certain provisions to small agreements under £50. The government intends to change the legislation so that BNPL/STIFC agreements do not benefit from this “exemption” even where the BNPL/STIFC agreement is for less than £50.
- The jurisdiction of the FOS must be extended. The government intends to extend the jurisdiction of the Financial Ombudsman Service to include the BNPL and STIFC contract within the scope of the regulations.
There is nothing particularly surprising or controversial about the HMT’s response, however, in our view, it will be essential that the regime (including the FCA rules) remains proportionate and does not materially prevent traders from provide payment options to consumers.
While the proposal to expand the regulatory scope is widely welcomed, if the rules (which have not yet been published or consulted) have the effect of making the customer journey long and onerous, this would be wrong and would not be proportionate to the risks BNPL credit. When drafting secondary law and regulatory rules, consideration should be given to online business models and drafters should ensure that the rules are suitable for online e-commerce business models and electronic communications. It is also welcome that the government is committed to reforming the CCA, as it is unnecessarily complex and outdated.
In addition, particularly given the current time taken by the FCA to process applications for authorisation, a sufficiently long transition window will be necessary to allow companies brought into the regulatory perimeter to apply for authorization from the FCA.
It is important to note that companies already approved and companies that will become so under the new regime will have to pay particular attention to financial promotion reforms, as BNPL / STIFC credit companies will have to have the capacity to approve financial promotions traders.
HM Treasury says it will publish and consult draft legislation by the end of 2022 and intends to table secondary legislation by mid-2023. The FCA will then consult on its regulatory rules for the new regime.
The government also noted in the response that the current consumer credit regulatory framework is built around a dated regulatory model established by the CCA. The newspaper says the government still intends to publish its first consultation on the CCA reforms later this year.