Treasury has published the long-awaited consultation on draft legislation to bring those who offer Buy-Now-Pay-Later and similar products within the scope of financial regulation. It has published both the draft law and a consultation paper which explains why it has taken certain policy decisions on what to include and what to leave outside the regulatory perimeter.
The Government had been concerned that, although there was clearly a need to regulate the more recent types of product, the “true” BNPL products, which are usually taken out online with a third party lenders and involve multiple low value agreements, these types of arrangement share their characteristics (and the RAO Article 60F(2) exemption) with more traditional short term interest free credit products, often taken out in-store and involving one agreement with either the store or a third party lender. The Government wanted to ensure it would regulate proportionately, focusing on products and services with the potential for consumer detriment.
Last year, it confirmed that regulation would include any STIFC that was provided by a third-party lender, as well as BNPL. Additionally, it was minded to cover any agreement provided by merchants online or at a distance. However, respondents to its consultation noted several merchants who would use the Article 60F(2) exemption at a distance, such as professional services providers and schools offering options to pay fees monthly, and merchants offering a way to pay for subscription services in such a way that the service stops if payments stop, such as gyms or season tickets. Having considered this the Government has decided only to regulate agreements offered by third-party lenders. It will introduce an “anti-avoidance” measure to prevent third party lenders entering into agreements with merchants under which the lender effectively becomes the merchant once the loan is taken out.
The upshot is that lenders under borrower-lender-supplier agreements for fixed sum credit to individuals or relevant recipients of credit will need to be authorised where the agreement is:
- interest free and repayable in 12 or fewer instalments within 12 months or less;
- provided by a person that is not the provider of goods or services to which the credit agreement relates; and
- is not exempt.
The current “business use” exemption for regulated credit agreements will also apply. The Government thought it would be disproportionate to regulate trade credit for smaller businesses, but thinks that now, because it will only regulate third party loans, businesses will still be able to defer payment for goods until they are paid.
Additionally, the Government consulted on whether Article 60F(3) exemption predominantly used by charge cards, and exempting certain interest-free running account credit was at risk of being adapted and used inappropriately in the BNPL markets. This exemption, though, requires the full outstanding amount to be repaid in one payment, and on reflection the Government has decided the exemption is fine as it is.
There will be a new exemption specifically to permit agreements that finance contracts of insurance where the insurer is not the lender (which would be exempt anyway), and an exemption to allow social landlords to operate under the current exemption when providing finance to their tenants for goods and services. Similarly employee loan arrangements will be exempt, even if the loan is from a third party arranged by the employer.
As originally proposed, merchants broking newly regulated agreements will not need to be authorised for credit broking except in the case of “domestic premises suppliers” – that is, doorstep sales.
The FPO will be amended to ensure that unauthorised merchants offering third party lender agreements will be required to get approval for promotions of agreements that will fell within regulation, and the DMRs will be disapplied for unauthorised brokers in cases where relevant information will be disclosed by authorised lenders under FCA rules.
The consultation also confirms the disapplication of the CCA pre-contractual requirements, in favour of more proportionate FCA rules.
Finally, there would be no “small agreements” exemption, so BNPL products under £50 would be caught.
Treasury will introduce a temporary permissions regime to ease the transition to FCA regulation
Consultation closes on 11 April. Treasury will publish a consultation response in due course and says it will then lay legislation when Parliamentary time allows, “with the ambition” that this will be during 2023.