Tuesday, 14 February 2023 saw an unlikely Valentine's gift in the form of the government's consultation paper on draft legislation to bring the buy-now pay-later (BNPL) sector within the regulatory perimeter. We review what the regime will look like.
Background
The government announced its intention to bring BNPL products within the FCA's regulatory regime in February 2021. This latest instalment from the government is the third in a series of policy documents regarding the regulation of the BNPL sector - it published a consultation on policy options in October 2021 and a consultation response in June 2022 – and should be seen against the backdrop of the February 2021 Woolard Review, which highlighted the potential for consumer harm in this rapidly evolving sector.
Current exemption
Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) provides an exemption for interest-free agreements repayable in under 12 months and in 12 or fewer instalments (A60F(2) agreements).
Arrangements in scope of the new regime
Taking into account stakeholder feedback, the government has decided that it would be disproportionate to regulate merchant-offered credit provided online or at a distance so it will legislate to regulate only A60F(2) agreements offered by a third-party lender (unless they fall within an applicable exemption).
Legislative changes
The government's draft legislation amends Article 60F(2) so that agreements will become regulated where they are borrower-lender-supplier agreements for fixed-sum credit to individuals or relevant recipients of credit which are:
- interest-free, repayable in 12 or fewer instalments within 12 months or less
- where the credit is provided by a person that is not the provider of goods or services which the credit agreement finances (ie third-party lenders)
- not exempt as a result of falling within one of the applicable exemptions (please see below)
Exemptions
A number of arrangements are not considered to pose a "substantive risk of consumer detriment." Some of these involve a third-party lender, which means that specific exemptions are required to ensure that they remain outside of regulation. The draft legislation includes exemptions for the following types of agreement:
- agreements to finance premiums under contracts of insurance
- agreements offered by a registered social landlord to its tenants and leaseholders to finance the provision of goods or services
- agreements where the borrowers are employees, which result from an arrangement between their employer and the lender of supplier.
Legislative changes are not required for those low risk arrangements which do not involve a third-party lender such as certain invoicing and trade credit arrangements.
Anti-avoidance mechanism
In its June 2022 consultation response, the government noted it was concerned about a particular business model that structures agreements so that the third-party BNPL lender becomes the merchant in the transaction that the lender is financing by purchasing the goods from the original supplier. As a result, the third-party BNPL would avoid regulation.
The draft legislation includes an anti-avoidance mechanism covering agreements that are provided by a third-party lender to finance purchases from a merchant, where the merchant has an arrangement with third-party lender under which the merchant agrees to sell the goods to the lender at the point when the agreement is taken out.
FCA authorisation
Third-party lenders offering A60F(2) agreements that are within scope will need to be authorised and regulated by the FCA. In addition, domestic premises suppliers offering newly regulated agreements from a third-party lender as a payment option will need to be authorised by the FCA as credit brokers.
Regulatory controls
The government believes a proportionate approach to applying regulatory controls should be taken given that these types of agreement are lower risk than other types of credit. Its view is that the regulatory regime for newly regulated agreements should be subject to:
- A flexible FCA rules-based regime for pre-contractual disclosures rather than the pre-contractual requirements found in the Consumer Credit Act 1974 (CCA).
- Tailored application of some of the FCA's current rules on creditworthiness assessments, to be determined by the FCA.
- The content requirements for agreements as set out in the Consumer Credit (Agreements) Regulations 2010.
- Requirements in the CCA relating to the provision of information to consumers in arrears and default.
- Section 75 of the CCA (liability of creditor for breaches by supplier).
- The jurisdiction of the Financial Ombudsman Service.
Temporary permissions regime
The government proposes to establish a temporary permissions regime (TPR), which will allow firms to continue to operate until they are fully authorised. To enter the TRP, firms will need to pay a non-refundable registration fee. The government expects that the following types of firms will need to enter the TPR if they wish to undertake newly regulated activity from 'regulation day':
- Third-party lenders offering A60F(2) agreements, who are not authorised by the FCA for lending.
- Third-party lenders that adopt the business model covered by the anti-avoidance mechanism.
- Domestic premises suppliers that only broker A60F(2) agreements, who do not currently have a full credit broking permission.
Part 4 of the draft legislation describes the proposed structure of the TPR.
Next steps
The government's consultation closes on 11 April 2023, after which it will consider responses to the consultation and make any necessary changes to the draft legislation. It expects to include a timetable for regulation in its consultation response and says its "ambition" is to lay legislation during 2023. The FCA plans to consult on its proposed conduct rules and rules for firms within the TPR prior to the legislation being laid before Parliament.
Help is at hand
If you have any questions about the new regulatory regime for BNPL products, please let us know.
