Following the Woolard Review in February this year, HM Treasury has now published its consultation paper on bringing exempt interest free "buy now pay later" lending (satisfying the requirements of Article 60F(2) Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO)) (BNPL) within the regulatory perimeter. The consultation sets out a number of proposals in respect of the potential approach to regulating BNPL, while seeking feedback from the industry on the extent to which those proposals are proportionate, appropriate and / or achieve the intended outcome of minimising consumer detriment. Firms have until 6 January 2022 to respond to the questions raised in the consultation.
It is clear from the consultation that, as recommended by Woolard, BNPL will be brought within the regulatory perimeter to some extent – although interestingly the paper does suggest that HM Treasury is not certain about the scope or nature of the consumer detriment that BNPL creates (going so far as to state that it currently has "relatively limited evidence of widespread consumer detriment", and acknowledging that the risks are "inherently lower than an interest-bearing credit product"). Consumer detriment aside, perhaps the most striking element of the paper is its apparent openness to respondents' feedback in influencing HM Treasury on a number of fundamental points where it doesn't currently appear to have settled on a preferred approach, including:
The paper raises questions about which types of currently unregulated interest free products should be classed as BNPL and therefore regulated accordingly. For example, HM Treasury acknowledges the distinction between:
- the type of BNPL product on which the paper goes on to focus, the use of which has grown rapidly in recent years and is often for the purchase of lower value consumer goods, for example fashion items purchased online (which, for the purposes of this briefing note, is what we will continue to refer to as BNPL); versus
- a more "traditional" point of sale finance model, which has been used in the market for some time by retailers to allow customers to purchase larger value items or services (medical services, sofas, kitchens etc.) or club memberships / season tickets, but spread the cost interest free across a relatively short period of time.
The paper suggests that the two models do not carry the same risk of consumer detriment, acknowledging that HM Treasury "has not seen substantive evidence of widespread consumer detriment" arising from the traditional point of sale finance model. It also recognises the benefit which the traditional point of sale finance model in particular can offer to consumers. It therefore asks respondents for their views and suggestions on where the line should be drawn in respect of which BNPL products are in scope and should therefore be regulated. HM Treasury's steer is that it is minded to treat the two models differently, making the former regulated and keeping the latter, traditional, point of sale finance lending exempt from regulation.
HM Treasury has picked up on the complexities of bringing BNPL into the scope of regulated lending. For example, a business providing an invoice to a consumer for payment at a later date will make use of the Article 60F(2) exemption. The paper explains that no harm has been identified in relation to this use and so they should be able to continue to rely on the Article 60F(2) exemption to do so going forwards. This raises complex questions over how best to amend the exemption to allow for this.
HM Treasury explains that it needs to be cognisant of lenders who might look to re-structure BNPL products so as to avoid regulation. For example, the consultation paper talks of needing to ensure that Article 60F(3) RAO does not provide an opportunity for the unregulated BNPL model to transition to and re-emerge as exempt running-account credit. HM Treasury again acknowledges that any amendments to the Article 60F(3) exemption to close down this potential loophole will need to be carefully designed to minimise the impact on other products that currently use this exemption and where HM Treasury is not aware of evidence of consumer detriment, such as charge cards.
The paper is not specific about how the government intends to implement the regulation of any BNPL products which are ultimately deemed to be in scope. The likelihood is that will be by way of amending the Article 60F(2) RAO exemption so it can't be used by the relevant BNPL products so that they are subject to the requirements of the CCA, then using a provision in the Financial Services Act 2021 which gives Treasury the ability to exclude certain provisions of the CCA from applying to those BNPL agreements (as flagged in our previous briefing here); and
3. Nature of any regulation
The paper is, perhaps surprisingly, relatively noncommittal in relation to HM Treasury's preferred approach to what regulatory requirements should apply to BNPL once it is brought within the perimeter. There are some points where HM Treasury has given a steer as to its view on specific rules (which we have commented on in more detail in the section below), but taken as a whole the paper still appears to give respondents a significant opportunity to influence the government's thinking on what rules and requirements are appropriate for regulated BNPL, and by contrast therefore what rules should not apply in any BNPL regulatory regime. We would therefore encourage interested stakeholders to feed back to HM Treasury as part of the consultation process.
In our view the consultation paper as a whole is encouraging for the industry as it appears to give respondents a genuine opportunity to shape HM Treasury's approach to the regulation of BNPL, which is clearly as of yet not set in stone.
We have set out below some of the steers HM Treasury has given on its thinking and likely ultimate approach on a number of specific points:
- CREDIT BROKING
With the exception of merchants selling goods in customers' homes, the paper indicates that HM Treasury is minded to make the broking of regulated BNPL exempt, i.e. not to require merchants offering BNPL to hold credit broking permission, an approach which will be of significant relief to the industry and merchants alike. The paper does suggest that the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 could be amended to bring BNPL inside the regime, meaning for example that merchants would need to obtain approval for BNPL financial promotions from an authorised person.
- CREDITWORTHINESS AND AFFORDABILITY
The paper proposes that BNPL lenders will have to carry out creditworthiness and affordability assessments, which was inevitable and one of the key points Woolard identified would help reduce potential consumer detriment in the BNPL market. The paper makes clear that it will be for the FCA to consider the extent to which its existing rules on creditworthiness and affordability might need to be amended for BNPL lending. It also flags that discussions will take place with credit reference agencies to establish how best to carry out reporting on BNPL borrowers' credit files. These conversations will likely be part of ongoing conversations the FCA is having with credit reference agencies as part of the credit information market study.
- ORIGINATION DOCUMENTATION
The government’s view is that the full extent of CCA-mandated pre-contractual information, when coupled with the requirements in FCA regulation, may not be appropriate for BNPL agreements – effectively proposing the removal of the strict and inflexible requirements for the PCCI under section 55 CCA, relying instead on the FCA's CONC requirements for firms to provide borrowers with an adequate explanation pre-contract. Similarly, the paper suggests that the strict requirements under section 60 CCA in respect of the form and content of agreements may be inappropriate for BNPL. It is suggested that the FCA will make rules and / or separate legislation will be developed to govern what requirements do apply to BNPL in respect of pre-contractual disclosures and the form of agreement. The tailoring of customer facing disclosures to the specific product the customer is looking to take out is a welcome proposal (and hopefully a helpful sign that collaborative conversations can be had going forwards as HM Treasury looks to consider any amendments needed more broadly to the CCA as part of the review of the retained provisions).
The paper indicates that HM Treasury is minded for section 61 CCA to apply to BNPL agreements. This would give rise to the automatic sanction of unenforceability without a court order where, for example, an agreement fails to comply with form and content requirements or is not signed in the manner prescribed by the CCA. HM Treasury's reasoning here is that this consequence of non-compliance provides a very strong incentive to lenders to provide the necessary information to a consumer. We expect that industry may have comments on the proportionality of this remedy in the unsecured interest free BNPL market. Discussion will be needed on what "proportionate" looks like here (especially given that lenders who enter into regulated mortgage contracts (and therefore likely extend the largest amount of credit a consumer will ever borrow and take security over their home), do not have such unenforceability consequences attaching to non-compliance).
The paper suggests that BNPL should be subject to regulatory requirements in respect of forbearance and the treatment of customers in financial difficulty, with an acknowledgement that it may be appropriate to amend the FCA's existing rules for the BNPL market.
- POST-CONTRACTUAL NOTICES
HM Treasury does not give any significant steer on whether it is of the view that the post-contractual notice (including NOSIAs, default notices, notices of default sums and termination notices) requirements of the CCA should apply to BNPL. Given the prescriptive requirements of the CCA in respect of such documents and the draconian consequences of non-compliance with those requirements (albeit arguably less of a concern in the unsecured interest free BNPL market than for interest bearing products, particularly in relation to remediation risk) it appears likely that HM Treasury will get significant feedback from industry on this point. Perhaps surprisingly there is no mention in the paper of whether HM Treasury has considered the application of section 77A CCA requirements in respect of annual statements to BNPL.
- SECTION 75 CCA
HM Treasury makes clear that, although it is aware that some BNPL providers do currently provide their own buyer protection schemes, it is currently of the view that a statutory protection should be available for consumers as part of the regulation of BNPL i.e. that section 75 CCA should apply. Again, this is an area where we suspect certain members of industry will want to feedback (especially in light of current issues with section 75 identified in the FCA's review of the retained provisions). For example, respondents to the consultation may want to comment on whether it would be proportionate:
- for a customer to be able to claim consequential losses from the BNPL lender; and
- for the BNPL lender to be held jointly and severally liable with the supplier (rather than to have second in line liability).
HM Treasury is of the view that BNPL borrowers should have recourse to FOS, which would clearly have significant implications for lenders both in terms of being subject to FOS decisions and the cost of FOS fees for each complaint.
- SMALL AGREEMENTS
Given the low average value of BNPL transactions across the market, the paper suggests that it would be necessary to consider amending section 17 of the CCA so that BNPL agreements are not subject to the existing carve out from certain parts of the CCA for "small agreements" of under £50.
As we have summarised above, the approach HM Treasury have taken in this consultation paper does appear to offer a real opportunity for respondents to feed back and shape government's decision making process for BNPL. We would expect that apparent level of openness and flexibility in terms of the scope and nature of the regulatory regime to be of encouragement to the industry and act as a significant incentive to take this chance to influence HM Treasury's thinking at this critical juncture for the BNPL market.
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