On 14 February 2023, the Treasury finally published its delayed consultation on draft legislation to bring BNPL within the regulatory perimeter. The legislation follows the general approach set out by the Treasury last summer to bringing BNPL within the regulatory perimeter. You can read more detail about the Treasury’s approach to BNPL regulation in our alert from July 2022.
There are, however, some key updates in the Treasury’s final policy position from its thinking from last summer on the scope of regulation. Most notably, in welcome news for the merchant community, the Treasury has decided to limit the scope of BNPL regulation to agreements that are offered by third-party lenders. This is a change from the Treasury’s previous position, when it was minded to extend the scope of regulation to capture agreements which are provided directly by merchants online or at a distance. The Treasury has now come to the view, after further engagement with stakeholders, that imposition of BNPL regulation on merchants in this manner would be disproportionate relative to the lack of consumer harm.
- The scope of regulation will be limited to agreements that are offered by third-party lenders. This is a change from the Treasury’s previous position, when it was minded to extend the scope of regulation to capture agreements which are provided directly by merchants online or at a distance. There will also be no monetary threshold below which regulation will not apply – all BNPL agreements will be caught regardless of value.
- The Treasury has decided not to make amendments to the exemption from regulation for certain types of interest-free running account credit, as it considers that BNPL providers will not be able to make use of the exemption as an alternative to regulation. While the Treasury had previously expressed concerns about the use of this exemption to circumvent regulation, it now believes that lenders currently offering products that appear to have some of the features of running-account agreements are, in fact, offering a series of fixed-sum agreements with a credit limit which sets the maximum overall balances that can be outstanding at any one time.
- The draft legislation includes a new anti-avoidance mechanism, which will capture agreements that are provided by a third-party lender to finance purchases from a merchant, but where the merchant has an arrangement with the third-party lender under which the merchant agrees to sell the goods to the lender at the point when the agreement is taken out. This is because the Treasury concerned about third-party BNPL lenders avoiding regulation by structuring agreements so that they technically become the merchant in the transaction they are financing, having purchased the goods from the original supplier.
- Business-to-business lending – i.e., trade credit – will remain outside scope, in keeping with the current approach to consumer credit regulation. There will be express exemptions from regulation for agreements financing contracts of insurance, agreements offered by registered social landlords to tenants and leaseholders, and employer-employee lending (e.g., to finance season tickets or tenancy deposits).
- Merchants will be exempt from credit broking regulation, unless they undertake home-visit selling practices. However, the financial promotions regime will apply to unauthorised merchants offering BNPL as a payment option. To mitigate the risk of potential consumer detriment from promotions made by unauthorised merchants, the Treasury intends that those merchants will be required to obtain approval for promotion of agreements which will be brought into regulation from an authorised person (which could, but does not have to, be their lender partner). In practice, the Treasury anticipates that merchants will not have all their financial promotions individually approved by an authorised person. Instead, the Treasury’s view is that third-party lender partners will provide pre-approved materials to merchants as part of the overarching commercial arrangements between the lender and merchant.
- In keeping with its general approach, the Treasury will tailor the application of the Consumer Credit Act 1974 (CCA) to BNPL, and the elements of lending practice most linked to potential consumer detriment. This includes disapplying the CCA’s pre-contractual provisions in favour of a more appropriate FCA rules-based regime. However, lenders applying the CCA’s pre-contractual provisions to BNPL should still be able to do so, provided the information is presented in a manner that is clear fair and not misleading and also complies with the FCA’s rules on pre-contractual information. The CCA requirements on the treatment of consumers in financial difficulty will apply to newly regulated BNPL agreements without further tailoring. However, this could be considered further as part of the broader CCA reform. In addition, section 75 will apply to newly regulated BNPL agreements without amendment (meaning that the monetary thresholds will not be tailored).
- The FCA will decide how its current rules on creditworthiness and credit files should be tailored to BNPL.
In further welcome news, the Treasury intends to put in place a transition period from the point at which the amending legislation is made. During this period, firms will be able to familiarise themselves with the new regime once the FCA has finalised its rules, and to make the necessary changes to their business models ahead of “regulation day” (the day on which regulation commences). A temporary permissions regime (TPR) will allow firms to continue to operate until they are fully authorised. Currently unauthorised firms will need to register with the FCA for entry into the TPR before regulation day. Third-party lenders who are already authorised for entering into a regulated credit agreement as lender, and domestic premises suppliers who are authorised for credit broking, will not need to register for the TPR as they will be able to rely on their existing permissions. The FCA’s forthcoming consultation on its proposed rules will provide more detail on how the TPR will work in practice.
Only agreements made on or after regulation day will be regulated. Unregulated exempt agreements taken out prior to regulation day will continue to be exempt.
Responses to the consultation are due by 11 April 2023. Once the Treasury has considered feedback to this consultation, it will consider any necessary changes to the draft legislation and intends to publish a consultation response which will set out the anticipated key milestones for regulation. Following that, the Treasury will lay legislation when Parliamentary time allows, with the ambition that this will be during 2023. There remains an opportunity to shape the Treasury’s approach to BNPL regulation – as has been clear from the evolution of its position, the Treasury has maintained an open-minded approach to stakeholder engagement, and has shown a willingness to change its position in response to feedback and evidence from the BNPL and merchant communities, particularly in relation to the unintended consequences of its policy position.