The UK Government is consulting on the necessary legislation to narrow the exemption for BNPL products. In this article, financial services expert Simon Deane-Johns outlines the potential impact of the proposed changes and what they will mean for the BNPL industry.
Is BNPL currently regulated?
Unsecured consumer credit (a cash loan or other ‘financial accommodation’) is regulated under the Consumer Credit Act 1974 (CCA) and the Financial Services and Markets Act 2000 (FSMA), as is the activity of ‘credit broking’ (introducing consumers to lenders or other credit brokers).
The scope of consumer credit regulation is being expanded to include BNPL agreements offered by lenders but not by suppliers directly. Initially, the Government intended to regulate all BNPL agreements provided by suppliers either online or at a distance, but this was found to disproportionately impact many types of arrangement where there is little, if any, evidence of consumer detriment.
Firms offering or investing in regulated credit agreements must be authorised by the FCA and must comply with relevant FCA rules and CCA obligations.
There is an ‘interest-free credit’ exemption that covers BNPL (as well as invoices that permit payment beyond the due date, for example, or agreements to pay in instalments) where:
- the agreement is a borrower-lender-supplier agreement for a fixed sum;
- no more than 12 payments are to be made by the borrower;
- payments are to be made within 12 months or earlier; and
- the credit is not conditional on interest or other charges (though charges might arise after the agreement is made, e.g. for missing payments).
BNPL products which take advantage of this exemption tend to either:
- split the cost of a purchase into several equal amounts, taken at regular intervals; or
- defer payment until a set time after the purchase is made and the item is not returned by the customer (‘try before you buy’), particularly for clothing.
Reducing the scope of the BNPL exemption
In effect the BNPL exemption will not apply where the credit is provided by a person who is a third party lender and not the provider of goods or services being financed (and no other exemption applies).
There is an ‘anti-avoidance’ measure to capture situations where the merchant sells the goods to the lender at the point when the agreement is taken out (seeking to turn the lender into a supplier). Advice would need to be sought as to whether other types of financing structures might also be caught.
Trade credit and invoicing arrangements will remain exempt, but new specific carve-outs have had to be made to exempt: finance insurance contracts/premiums; for registered social landlords to finance the provision of goods and services to their tenants; and where the borrowers are employees and the finance results from an arrangement between their employer and the lender or supplier.
The relevant agreements that do not fit the exemption will qualify as regulated credit agreements within the consumer credit regime under the Regulated Activities Order (RAO). Firms offering those agreements and related regulated activities will need to be authorised and supervised by the FCA, with complaints referable to the Financial Ombudsman Service.
These agreements will not benefit from lighter regulation that applies to ‘small agreements’ but will be spared certain pre-contract explanations under the Consumer Credit Act 1974 (CCA) in favour of more proportionate FCA disclosure rules. Consumers are also spared a deluge of information because certain other distance marketing disclosures won’t need to be made for these agreements by unauthorised brokers where the information has already been provided by the authorised lender.
Those introducing borrowers to lenders to obtain regulated BNPL agreements will not need to be authorised for credit broking unless conducting that activity in the borrower’s home.
Advertisements and other ‘financial promotions’ communicated by unauthorised firms for regulated BNPL agreements will need to be pre-approved by an FCA authorised firm (which could not be a firm acting as a payment or e-money institution).
The new regulations won’t apply to relevant agreements entered into prior to the changes taking effect; and there are transitional arrangements to enable firms to carry on certain regulated activities in relation to regulated BNPL agreements for a limited time to allow them to get properly authorised, the duration of which is a matter for the FCA. But any business that avails itself of the ‘temporary permission regime’ must comply with the law and FCA rules applicable to consumer lending (or exercising a lender’s rights) and credit broking (if visiting borrowers’ homes). That could be a very steep learning curve for any firm operating as an unregulated BNPL provider today.
The FCA will determine the rules on credit checks. This could prove problematic where the use of BNPL would tend to suggest the borrower can’t afford the price of a fairly low-value item.
However, there remains uncertainty over the extent to which the form of agreements and post-contractual notices will be prescribed.
The limits for the application of ‘section 75’ CCA liability for suppliers will not be altered (£100 to £30,000).
A detailed FCA consultation is expected in the coming months.
If you have questions about the proposed regulatory changes, please contact Simon Deane-Johns.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.