Treasury has published the long-awaited consultation on buy-now pay-later regulation, following the announcement on 2 February that the Government would implement the Woolard Review recommendation to bring interest free BNPL products within the scope of regulation. The consultation takes account of the need to calibrate the regulatory controls that should be put in place so that regulation addresses the potential for consumer detriment without unnecessarily limiting useful products.
Currently, those who offer interest free BNPL products may do so under an exemption in the RAO for agreements that provide interest-free credit under a borrower-lender-supplier agreement for fixed sum credit, where the sums borrowed must be paid within 12 months and in 12 instalments or fewer.
These products typically are:
- arrangements that split the cost of consumer goods and services into several equal amounts taken at regular intervals and arrangements which require payment only after a certain amount of time (often used in “try before you buy” scenarios);
- short-term interest free credit such as that used to help consumers to finance higher-value goods and those that allow monthly payments for memberships, season tickets and similar products; and
- invoicing arrangements which allow for payment later than the contractual due date.
Treasury is most concerned about arrangements which fall within the first bullet. The growth in its use, especially for lower value and fashion items, and in the context of online sales, has caused concerns around, for example, the way the credit is promoted, consumer understanding of the product and the potential for it to create high levels of indebtedness though lack of creditworthiness assessments.
Treasury asks for views on the respective risks of the different models and explains the options it has considered, specifically:
- restricting the extension of regulation to agreements where there is a third party lender; and
- defining a BNPL relationship as one where there is a pre-existing relationship between the consumer and the lender.
It is concerned that using the first option would create a clear boundary, but would draw in a large proportion of short-term interest free credit which has largely operated problem-free under the exemption for years. It is concerned that the second could be circumvented by changing the arrangements slightly to fall outside scope and become running-account credit (which has a separate exemption that could be used).
Treasury notes that, when currently exempt agreements fall within scope, merchants that offer the products would start to carry on the regulated activity of credit broking and would need to become authorised – which would come with significant burdens and cost. If, because of this, the merchants decided not to offer the financing option, this would limit consumer choice and may confer an unfair competitive advantage on larger merchants who are already authorised or who have the capacity to become so. As a result, Treasury would plan to accompany any extension of the perimeter in terms of the product with an exemption that would mean that merchants offering it would not need to become credit brokers.
Alongside any extensions to the regulatory perimeter, Treasury seeks views on whether the current controls around advertising of BNPL products are sufficient, whether they should be brought within the financial promotion regime and the effects of extending the regime in this way.
In terms of customer documentation, Treasury feels that the full extent of CCA-mandated pre-contractual information may not be appropriate for BNPL agreements and so the inflexible requirements of the CCA could be disapplied, with FCA rules being the proportionate regulatory model. Similarly, these agreements are likely to require bespoke form and content requirements.
Treasury also seeks views on whether the CCA provisions on improper execution and the FCA requirements on creditworthiness assessments should apply, and how customers in financial difficulty should be treated. It also considers that s75 protection should apply to any agreements that come within scope, and that FOS should have jurisdiction over complaints.
Consultation closes on 6 January 2022.