February 14th saw a Valentine’s Day present from HM Treasury as it launched its much-anticipated consultation on the future regulation of the buy-now-pay-later (“BNPL”) sector. The consultation sets out how BNPL firms could be regulated by the Financial Conduct Authority (“FCA”).
Under the proposed legislation, firms which offer BNPL products will be regulated if the agreement is;
- 0% interest and is repayable in 12 or fewer instalments within 12 months or less
- Provided by a person who is not the provider of goods or services (i.e. third-party lenders, who will need to be authorised and regulated by the FCA)
- not covered by an alternate exemption.
The draft legislation provides for an ‘anti-avoidance mechanism’ by preventing pre-agreed sales goods or services to a lender (i.e at the point the consumer enters into their credit agreement, the lender owns the goods and thus is not a “third-party” in the transaction).
Firms offering BNPL agreements will be required to obtain permission(s) from the FCA. Firms will likely need to apply for one or more of the following;
- Entering into a regulated credit agreement as lender
- Exercising, or having the right to exercise, the lender’s rights and duties under a regulated credit agreement
- Credit broking (for domestic premises supplier merchants that offer regulated agreements)
In addition, the consultation sets out how the proposed approach will be implemented through the draft legislation;
Credit broking
A new article 36FB in The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”) will ensure that merchants that introduce their customers to BNPL regulated agreements will remain exempt from credit broking regulation.
Domestic premises suppliers
Merchants offering BNPL products from third-party lenders in customers’ homes will be required to obtain FCA full permission credit broking authorisation.
Financial Promotions
The draft legislation amends the Financial Promotions Order to require merchants which are exempt under the changes to obtain approval from an authorised person for promotion of agreements which will be brought into regulation.
Pre-contract information
Firms offering BNPL agreements will need to comply with FCA rules on pre-contractual disclosure of information.
Small agreements
The consultation sets out that there will be an amendment to the ‘small agreement’ (under £50) exemption to exclude newly regulated agreements, meaning that BNPL loans in scope will be regulated regardless of value.
Creditworthiness
The consultation proposes that regulation of BNPL will require the FCA to tailor its current rules on creditworthiness assessments. The proposals view is that it is for the regulator to decide how the current rules need to be tailored for BNPL.
Financial Ombudsman Service
Moving BNPL agreements to regulated from unregulated will grant consumers the right to pursue complaints through to the Financial Ombudsman Service.
Temporary Permissions
As we saw with the transfer of Consumer Credit in 2014 and Claims Management in 2019, the consultation proposes to put in place a Temporary Permissions Regime (“TPR”). This will grant BNPL firms temporary permission to continue to operate until they are fully authorised by the FCA. Exempt agreements which have been entered into prior to the FCA taking responsibility of regulation will continue to be exempt.
Consultation
The consultation will be open for eight weeks and closes on 11 April 2023. Once responses to the consultation have been considered, HM Treasury will consider any necessary changes to the draft legislation and will publish a consultation response which will set out the anticipated key milestones for BNPL regulation. Following that, the legislation will be laid before Parliament with the ambition that the changes will be introduced be during 2023.