Buy Now Pay Later - is the (unregulated) end finally in sight?

There have been concerns for some time that the proliferation of easy-to-get (or frictionless) Buy-Now-Pay-Later ("BNPL") credit from unregulated lenders (who are unconstrained by the checks and balances required by regulation) was an accident waiting to happen. 

In the interests of my readership I selflessly did much of my 2022 Christmas shopping using BNPL where it was offered to see how easy it was to get credit.  The answer was VERY quick and VERY easy.  Sat in front of a computer it was surprisingly straightforward to run up a fairly eye-watering total across a number of online merchants in a single evening.   

Survey findings from Citizens Advice suggest that 41% of 2,700 respondents who used BNPL struggled to make a payment.  So, not quite a disaster but certainly a valid concern that needs addressing.  It has been a while coming, with some fairly unsubtle recent nudges from the APPG on Fintech, but it is here at last, a concrete step towards the regulation of BNPL.  With an elephantine gestation period starting with the government's announcement back in February 2021 of potential regulation, we now have the consultation on draft legislation.

What's out?

Suppliers of goods and services who grant credit directly, without the involvement of a third party lender, will be breathing a sigh of relief.  While it was always proposed that in-person transactions would remain exempt, the position where such transactions were dealt with at a distance was undecided.  In a decision that will please the private schools, online merchants, dentists, gyms and heating oil suppliers who let customers spread costs (among others - the respondents to the initial consultation were a varied bunch), the government has decided that regulation will only apply to agreements offered by third-party lenders.  This is on the basis that there is no clear evidence that credit agreements made directly between suppliers and customers give rise to a substantive risk of consumer detriment.      

What's in?

Unsurprisingly, the draft legislation provides that those providing BNPL facilities as a business will be brought within the regulatory perimeter.  

The draft legislation proposes that borrower-lender-supplier agreements for fixed sum credit will become regulated where the credit is :

• interest-free, repayable in 12 or fewer instalments within 12 months or less;
  
  
• provided by a third party lender i.e. not the provider of the goods or services; and
  
  
• not exempt under one of the "new" exemptions.

The exemptions

As you might expect, these are fairly limited.  They apply only to interest-free 12 month (or less) credit agreements:

• to spread the cost of insurance premiums;
  
  
• offered by registered social landlords to enable tenants to finance the provision of goods and services; and    
  
  
• employee loans where offered as part of employee benefits and assistance schemes e.g. season ticket loans;

   A proportionate approach

The government accepts that currently unregulated BNPL loans are lower risk than other types of credit and that therefore regulation needs to be proportionate.  There is clearly no political wish to cut off access to interest free credit facilities by making them uncommercial for lenders to offer.  A tailored approach is therefore proposed in some areas, while in others it is proposed that the existing requirements for regulated credit agreements are retained:

• Most merchants who only offer newly regulated BNPL agreements as a payment option will not need to be authorised as credit brokers.  There is a corresponding disapplication of the relevant provisions of the Financial Services (Distance Marketing) Regulations 2004 for such brokers. The new provisions do not apply to domestic premises suppliers - those suppliers who sell goods, offer or agree to sell goods, or offer or contract to supply services to customers during home visits;
  
  
• Unauthorised merchants will still need to have financial promotions approved by an authorised person;  
  
  
• A flexible rules-based regime for pre-contractual disclosure is proposed - this has the added benefit that the disapplication of the requirements under the Consumer Credit (Disclosure of Information) Regulations 2010 also disapplies the sanction of unenforceability for failure to comply with the requirements - win win!
  
  
• The existing provisions which provide a light touch regime for agreements below £50 (small agreements) will be switched off for BNPL facilities so that the full suite of CCA requirements apply;
  
  
• The FCA will make the decision as to how the existing creditworthiness assessment rules should be tailored to BNPL loans;
  
  
• It is proposed that the existing requirements for the form and content of regulated credit agreements will apply, as will the requirements on the treatment of customers in financial difficulty;
  
  
• Section 75 CCA will apply; and
  
  
• The Financial Ombudsman Service ("FOS") will have jurisdiction to consider complaints (although the potential disproportionality of the FOS case fee compared the value of agreements may be considered by the FOS).

Temporary permissions regime

Many BNPL lenders are already regulated since they offer a range of credit facilities but, for some, this will be the first time they are applying for authorisation.  Having taken two years to get to this point, the focus is now on speed and therefore a temporary permissions regime ("TPR") is proposed which will require lenders to register before the date on which BNPL agreements come within the regulatory perimeter ("Regulation Day").  This is similar to the exercise undertaken when consumer credit first came into the FSMA fold and, more recently, as a a result of Brexit.  Existing unauthorised BNPL lenders will need to register for the TPR within a set window and will need to be provide required information and pay a non-refundable registration fee.  They will then be given a landing slot during which a full application for authorisation must be made.

BNPL agreements entered into before or during the TPR

The government has helpfully confirmed that loans entered into before Regulation Day will continue to be unregulated.  This confirmation will be a relief for those involved in current and future securitisations of BNPL loan books.   It also means that lenders who decide not to obtain authorisation, and instead exit the market, will be able to continue to service agreements they entered into before Regulation Day.

The position is not so straightforward where a firm enters the TPR and then decides not to apply for full permission.  In that case, any agreements entered into on or after Regulation Day will be regulated credit agreements and therefore servicing the loans will be a regulated activity.  To avoid the position of a firm having to hold a fire sale of loans which it can no longer service without breaching the general prohibition, the proposal is that firms exiting the lending market can retain a temporary permission for exercising, or having the right to exercise, the lender's right and duties under a regulated credit agreement.  It will be a quasi-authorisation of sorts - the FCA will continue to supervise the firm while the loan book is in run-off and will be able to take enforcement action in the case of wrong-doing. Given that, by definition, the maximum loan term is 12 months, while lenders might use the breathing space to secure an orderly sale of the loan book, for performing books, they might simply sit it out.  

What Next

The consultation is a short one - responses must be in before midnight on 11 April  2023, coinciding with finishing off the last of the Easter eggs in my house.   

Once the consultation has closed, a consultation response will set out the key milestones for regulation, with the ambition of laying the legislation before Parliament during 2023.  The FCA will also need to consult on the conduct of business rules and the tailored regime. 

Will 2022 have been my last year for running amok with the family finances at Christmas or will I get another opportunity in December 2023?  Watch this space!