In the wake of its recent announcement about the government’s commitment to reform of the Consumer Credit Act (CCA), the Treasury (HMT) has published the response to its October 2021 consultation on the scope and form of a new regulatory regime for Buy-Now Pay-Later (BNPL) products.
Whilst much of the proposed regime remains the same as that suggested in last year’s consultation, HMT is now proposing to extend the regulatory perimeter to capture some Short Term Interest Free Credit (STIFC).
HMT is still promising a “proportionate regime” for those caught, although many of the existing CCA protections will be retained until the broader reform of the CCA is complete.
The regulatory perimeter – a new line in the sand
The government has decided that given changes in business models in the BNPL and STIFC markets that blur the distinction made in the consultation, the scope of regulation should be expanded to bring STIFC provided by third-party lenders into regulation.
The government is also thinking about extending the scope of regulation to capture STIFC agreements which are provided directly by merchants online or at a distance (but not in-person in-store).
Some arrangements that are currently exempt – including invoicing, arrangements which allow insurance policies to be paid for in monthly instalments, charge cards, trade credit and most interest free employer-employee lending – will remain so as they are not seen as high risk to consumers.
The regulatory framework
As well as the requirement to be authorised, providers of BNPL products (and STIFC products to the extent they are in scope of the requirements) will need to comply with new conduct rules.
The framework will be a combination of existing and tailored CCA requirements as well as existing and tailored conduct rules within the Financial Conduct Authority (FCA) handbook.
The main points to note from this are as follows:
Credit broking – merchants broking BNPL and regulated STIFC agreements will not need to be authorised by the FCA as a credit broker (with one limited exception for domestic premises suppliers).
Financial promotions – HMT has confirmed that the financial promotions regime will be extended to all merchants offering BNPL and STIFC products as payment options. This means that merchants will need approval from an authorised person before communicating any promotions. The FCA will consult on its proposals for rules on financial promotions for BNPL and STIFC agreements in due course.
Pre-contractual information (PCI) – the more flexible FCA rules-based regime in CONC rather than the Consumer Credit Act will apply to agreements brought within regulation. The FCA plans to introduce specific rules for pre-contract disclosure for BNPL or STIFC products.
Credit agreements – the form and content of BNPL and STIFC agreements will be prescribed in secondary legislation made under the CCA.
Creditworthiness and consumers in financial difficulty – Current FCA rules on creditworthiness and requirements around how firms treat customers in financial difficulty will apply.
Post contractual statements and notices – the relevant provisions under the CCA will apply subject to tailoring required to reflect the nature of BNPL and STIFC agreements.
Improper execution – these provisions will apply meaning where an agreement is improperly executed, it will be unenforceable against the borrower without a court order.
S.75- the protection afforded under section 75 of the CCA will apply.
The Financial Ombudsman Service – customers will be able to complain to the FOS.
Next steps and timings
In relation to the extension of the regulation to STIFC products provided by merchants online or at a distance, HMT is still to make a final decision albeit it is minded to bring them within regulation.
On this point HMT is keen to hear stakeholders’ views to ensure that this will be a proportionate approach and has asked for further information to be provided to it by Monday 1 August.
HMT intends to consult on draft legislation which will be published by the end of 2022 with the aim to lay that as secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime.
Undertaking this second consultation on the draft legislation later this year will enable the FCA to obtain feedback from firms on its proposed approach for the new regime and undertake a cost-benefit analysis. The final requirements are unlikely to come into force before the end of 2023.
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