On 20 June 2022 HMT announced its plans to bring interest free Buy-Now-Pay-Later (BNPL) lending within the Financial Conduct Authority's (FCA) regulatory perimeter.
In addition, within the proposals HMT is minded to also extend the perimeter to cover other forms of short-term interest free credit (STIFC) that pose similar risks as BNPL.
HMT's plans for regulating this sector are broadly:
- to amend the scope of the regulatory perimeter to capture
- unregulated BNPL products; and
- other, currently exempt, STIFC products when they are either
- provided by third-party lenders; or
- provided by a merchant where offered online or at a distance,
which means that providers of these products will need to be authorised by the FCA.
- to capture the regulatory requirements for these products in a combination of tailored and existing FCA conduct rules and tailored and existing Consumer Credit Act 1974 (CCA) requirements.
HMT recognises that certain STIFC products will remain exempt from regulation where the risk of potential consumer detriment is low and where regulation would otherwise adversely impact day-to-day business activities (such as invoicing, credit funded insurance and charge cards).
TIMING AND NEXT STEPS
In relation to the extension of the regulation to STIFC products provided by merchants online or at a distance, HMT has not yet made a final decision albeit it is minded to bring them within regulation. On this HMT is keen to hear stakeholders' views to ensure that this will be a proportionate approach and has asked for further information to be provided to it by Monday 1 August.
HMT intends to consult on draft legislation which will be published by the end 2022 with the aim to lay that as secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime. Undertaking this second consultation on the draft legislation later this year will enable the FCA to obtain feedback from firms on its proposed approach for the new regime and undertake a cost-benefit analysis. The final requirements are unlikely to come into force before the end of 2023.
THE REGULATORY FRAMEWORK
As well as the requirement to be authorised, providers of BNPL products (and STIFC products to the extent they are in scope of the requirements) will need to comply with new conduct rules.
The framework will be a combination of existing and tailored CCA requirements as well as existing and tailored conduct rules within the FCA handbook.
Disappointingly, many of the conduct requirements for BNPL will still sit in the CCA and its subordinate legislation – for example: form and content of agreements and post contractual statements and notices along with the associated implications of failure to comply.
This is disappointing as HMT has not taken the opportunity now to regulate BNPL and STIFC in a more dynamic and innovative way and incorporate the requirements solely within FCA conduct rules as a precursor to the upcoming review of the CCA retained provisions which is likely to see many CCA requirements moved into the FCA Handbook. However, pending the review of the retained provisions it does provide more of a level playing field for regulated BNPL and STIFC and mainstream regulated credit products.
In relation to the main points to note:
- merchants offering agreements which are brought into regulation as a payment option will not require permission for credit broking. This is with one limited exception for domestic premises suppliers to avoid risks of pressure selling.
- all advertising and promotions of BNPL and regulated STIFC agreements will fall within the financial promotions regime. This includes financial promotions by merchants offering BNPL and STIFC as payment options. Where a merchant is not authorised by the FCA it will need an authorised firm to approve any financial promotions of the BNPL or STIFC products.
- The CCA pre-contractual provisions will be dis-applied and instead the FCA will introduce specific rules for pre-contract disclosure for BNPL or STIFC products within CONC.
- The form and content of BNPL and STIFC agreements will still be subject to the requirements of the CCA, but new secondary legislation will be made which is specific to BNPL and STIFC agreements and different to the current form and content requirements for other CCA regulated agreements.
- The provisions on improper execution of agreements in section 61 CCA will still apply. This means that where an agreement is improperly executed it will be unenforceable against the borrower without a court order.
- The provisions on post contractual statements and notices under the CCA will apply subject to tailoring required for the nature of BNPL and STIFC agreements.
- The FCA rules on affordability assessments and treatment of borrowers in default or arrears will apply.
- Section 75 protections of the CCA (connected lender liability) will apply.
- Borrowers will have access to the Financial Ombudsman Service.
EXEMPTIONS FOR CERTAIN LOW RISK PRODUCTS
Certain products will be out of scope and remain exempt including: invoicing, interest-free agreements which finance contracts of insurance, charge cards and employer/employee lending where agreements are offered by a third-party lender but facilitated by an employer.
If you have any queries, please pick up with any member of our team.