The significant impact of the pandemic and increased use of buy-now-pay-later (BNPL) products offered by well-known retailers was a focal point of the Woolard Review published by the Financial Conduct Authority (FCA) in February 2021. The review outlined the previous CEO's recommendations for change and innovation in the unsecured credit market as part of the regulator's objective to protect consumers and the financial market. Shortly following this, the HM Treasury announced that interest free buy-now-pay-later credit agreements were to fall under regulatory scope and be regulated by the FCA.
On 21 October 2021, the HM Treasury published a consultation paper on BNPL products which discussed the potential scope of regulation to target potential consumer harm. The main areas covered include:
- Credit Broking - The scope of regulation will be proportionate with fewer regulatory requirements to reflect the existing view of credit broking as low risk activity. This means that merchants offering broking BPNL as brokers will likely not require FCA authorisation as a credit broker. The consultation discusses mitigating potential consumer harm by the extension of financial promotions requirements and the application of existing consumer credit law (CCA and Consumer Protection from Unfair Trading Regulations 2008, which protects consumers from unfair or misleading trading practices);
- Financial promotions - Promotions of BNPL products is expected to be captured within the financial promotions regime. This requires for marketing and communication which invite or induce customers to enter into credit agreements to either FCA-authorised or to get approval from an FCA-authorised person. Currently not all BNPL products are under the financial promotions remit; merchants' marketing and advertising to customers to enter a BNPL agreement, which is offered by a FCA authorised lender, do not need to seek approval of the promotion from an authorised person. However the change in regulatory scope could result in such firms seeking pre approval of promotions from an authorised person as well as authorised individuals who approve financial promotions to undergo further checks and training. This is to strengthen of the financial promotions regime. Additionally, the standard that financial promotion communications are ' clear, fair and not misleading’ will remain. This could require firms to have clearer and prominent messaging in pre-contractual communication with customers of negative consequences of agreement such as arrears fees and transfer to debt collectors.
- Pre-contractual information (PCI) – The consultation highlights the importance of consumers understanding the risks and features of the agreement before they enter into it. This is currently governed by the legislation set out in section 55 of the Consumer Credit Act 1974 (CCA); however the entry of BNPL into regulatory scope could shift the application of rules to the FCA rules set out in CONC. These FCA rules require firms to make adequate pre-contractual explanation in order for the customer to assess whether the agreement is suitable and adapted to their needs and financial situation. Some of this includes a breakdown on how much the customer is required to repay both in periodic payments and in total under the agreement, highlighting features of the agreement that may be unsuitable for customer and potential impact to credit rating and future access to credit if customer fails to repay.
- Credit agreements – Although existing mainstream consumer credit regulations may be inappropriate for BNPL agreements due to the particular characteristics of the product the consultation discusses the potential need to develop bespoke legislation requirements for BNPL, which will be applicable to suit the characteristics of BNPL agreements and how it is used by consumers in practice.
- Creditworthiness and consumers in financial difficulty – A major shift in BNPL entering regulatory scope is that currently there is no requirement for BNPL providers to conduct creditworthiness assessment of customers. Although the current landscape allow for easier access to credit, the FCA's concerns are two fold – that customers will not be able to repay lenders, and that customers may take on more debt than they are able to repay. The consultation discusses the implementation of proportionate rules to govern creditworthiness assessments for BNPL agreements.
The consultation is yet to decide on the application of BNPL regulation capturing 3 month or 12 month BNPL agreements and the question is out to define the distinction between BNPL products and other short-term interest free credit.
The consultation closes 6 January 2022 and responses are welcomed from consumer groups, BNPL lenders, short-term interest-free credit lenders and other lenders businesses, such as retailers, which offer BNPL and short-term interest-free credit.
You can submit responses to the consultation to firstname.lastname@example.org
Or alternatively to:
Buy-Now Pay-Later Consultation, Personal Finances and Funds Team, HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ
To find out more about how the regulation of BNPL can affect your business, please contact the DWF's Regulatory Consulting Team.