Buy-Now Pay-Later regulation: Government confirms final position

Key aspects of the BNPL regime

• Deferred Payment Credit (DPC) – regulated BNPL agreements will be referred to as “regulated deferred payment credit agreements”.
• Only third-party lending in scope:  Merchant-provided instalment credit will remain exempt. However the draft SI also includes an anti-avoidance provision to deal with reseller-type arrangements. This will ensure that an agreement under which the lender purchases the goods and resells them as merchant will be regulated and not exempt. 
• Bespoke FCA regime for information and post-contract servicing requirements:  CCA disclosure and servicing rules (e.g. in relation to pre-contract disclosure, content of agreements and the requirement to send statements and notices of sums in arrears) will be disapplied for DPC. The FCA will instead develop bespoke rules. This disapplication aligns with the direction of CCA Reform, where these provisions are proposed to be repealed entirely.
• Merchant credit broking excluded:  Most merchants offering DPC will be excluded from FCA licensing as credit brokers. However, unauthorised merchants must have any financial promotions approved by an authorised firm. This will normally be the third party lender, provided they have financial promotion approval permissions.
• Broking exclusion does not extend to Domestic Premises Suppliers: However, the position remains under review following late-stage feedback. The Government is actively considering whether to exclude these suppliers (e.g. those offering in-home sales) from licensing requirements. Legislation reflects the consultation position for now.
• No CCA enforcement sanctions:  DPC will not be subject to CCA enforcement sanctions (unenforceability, disentitlement to interest, etc.). Instead, firms will be regulated via the FCA’s principles-based regime, including oversight under Consumer Duty, the Consumer Credit Sourcebook (CONC) (including arrears and forbearance rules), Breathing Space, and FOS jurisdiction.
• Access to s75 CCA protections: S75 CCA will be extended to DPC agreements. There is however no proposal to adjust the £100 minimum transaction threshold so s75 is unlikely to apply to many BNPL agreements given the average value of a BNPL transaction is less than £100. Firms will therefore need to consider carefully how they represent s75 protections in marketing.
• ‘Small agreements’ exemption disapplied: In order to maintain a level playing field, the Government has proposed to repeal the s17 CCA exemption for small agreements. The Government noted the potential inconsistency created by the BNPL approach as lenders offering agreements for interest-bearing credit not exceeding £50 would not be subject to, for example, CCA requirements relating to the form and content of agreements or FCA rules on creditworthiness, whilst lenders offering BNPL agreements would be subject to these requirements.
• Retention of Time Orders and s86 CCA:  Time Orders under s129 CCA will remain available for DPC agreements. S86 (court order required for enforcement after debtor’s death) will also apply.
• Temporary Permissions Regime (TPR) to be established:  This will allow BNPL firms to continue operations while seeking authorisation. This will be implemented via forthcoming legislation. Firms will want to check carefully the eligibility requirements when the draft legislation is published.
• TPR firms can approve their own financial promotions:  DPC firms in the TPR will be able to approve their own financial promotions, including for onward communication by unauthorised merchants. However, they can’t approve a merchant’s own promotional content. This reflects a specific revision to the draft SI to correct misalignment with policy intent.
• SM&CR disapplied:  Firms operating under the TPR will be exempt from both the Senior Managers and Certification Regimes.
• Interaction with PSRs to be addressed by the FCA:  Where DPC arrangements qualify as payment services, providers must also comply with the Payment Services Regulations 2017 (PSRs). To prevent duplication, the FCA may disapply information requirements for DPC agreements where information has already been provided in compliance with the PSRs. This issue is left to the FCA to address in detail during rulemaking.
• Distance marketing rules disapplied for unauthorised brokers: The Financial Services (Distance Marketing) Regulations 2004 (DMRs) will not apply to unauthorised brokers where information is disclosed by authorised lenders in accordance with FCA rules on distance marketing. Retailers will not be in breach of the DMRs if a third-party BNPL firm does not properly comply with FCA distance marketing rules. However, this approach will be revisited as part of CCA reform.

What’s changed?

The Government has confirmed its intended approach with only minor changes to the previously consulted position. Key changes in approach following consultation include:

SM&CR

The Government considered whether the drafting of the SI would apply the SM&CR unevenly to firms in the TPR. While the Senior Managers component would be disapplied, the Certification element would still apply. The Government concluded that the most balanced approach is to exempt firms in the TPR from the both the senior managers and certification parts of the SM&CR regime. This will reduce the burdens on both firms and the FCA. The draft SI has been updated to reflect this.

Financial promotions

Previous drafting of the SI would have prevented unauthorised merchants from communicating financial promotions that had been approved by BNPL firms in the TPR, as firms in the TPR would not be deemed authorised for the purposes of section 21(2)(b) of FSMA (restrictions on financial promotion). The drafting has been revised to align with the policy intent.

S86 CCA

The original consultation confirmed that BNPL lenders would continue to be subject to requirements under s86 CCA. This section requires a lender to apply for a court order if it wishes to take certain enforcement action following the death of a borrower. Whilst the overall position remains the same, in response to feedback on drafting, the proposed amendment to s86 has been removed as that section would apply to BNPL lenders in the absence of the amendment.

Scottish registered social landlords

Registered social landlords who offer BNPL agreements to their tenants are exempt under the regime. However, following feedback on how the Scottish legal system operates, the SI has been amended to include provisions for shared ownership arrangements in Scotland.

Areas of continued uncertainty

While the policy direction is clear, key details remain to be determined.

The FCA’s bespoke rules

The FCA has been tasked with designing a bespoke regime for BNPL including in relation to information disclosure, affordability and creditworthiness assessments. What those rules will look like in practice remains to be seen. In the absence of those rules, it’s difficult for firms to plan for change. There is a clear opportunity for the BNPL industry to liaise with the FCA on these areas prior to its own consultation which is expected later this year.

The TPR

Whilst the draft SI legislates for the establishment of a TPR, the exact details of the TPR are not yet known including application timings and eligibility. The FCA's consultation on its proposed rules will provide more detail on how the TPR will work in practice and when applications for full permission need to be made.

Treatment of domestic premises suppliers

In late March, the Government received feedback that domestic premises suppliers should be exempt from the requirement to become authorised credit brokers. Respondents noted that a new and emerging market is developing, in which businesses conducting sales in people’s homes (e.g. emergency plumbers) can invoice customers with BNPL payment options. This can often take the form of a sole trader partnering with an invoicing firm, which has, in turn, partnered with a BNPL firm to offer its products. They explained that the small sums associated with these sales are very different from traditional domestic premises suppliers model, where credit agreements for thousands of pounds are drawn up in people’s homes. They contended that not granting the exemption to domestic premises suppliers could result in disproportionate burdens on businesses, including SMEs, and/or restrict consumer choice, resulting in consumers opting for other, costlier forms of credit instead.

Because the concerns were raised at a late stage, it was not possible for the Government to reach a final view on the regulatory approach without delaying legislation. The Government has therefore chosen to proceed with the legislation as originally drafted. However, it has committed to engage with stakeholders to better understand this issue and to help determine whether domestic premises suppliers should be exempt from credit broking regulation. The Government is expected to outline its position and will next steps “in due course”.

Co-ordination with the PSRs for dual-regulated BNPL / payment firms

Once regulation is in place, a BNPL firm offering a product that is also a payment service will also need to comply with the PSRs. The Government noted that to prevent duplication and ensure the BNPL rules remain proportionate, the FCA may be able to design its rules to include a disapplication of information requirements where information has already been provided in compliance with the PSRs. Again, it’s not clear what those rules will look like.

Reporting to credit reference agencies

In its consultation, the Government emphasised the importance of consumer credit firms reporting data to credit reference agencies (CRAs). Whilst there is no current regulatory requirement for firms to share this data, the FCA has proposed a mandatory sharing requirement with designated CRAs for regulated firms in its Credit Information Market Study. The Government has committed to maintain ongoing engagement with CRAs to closely monitor the reporting of data related to consumers’ BNPL agreements. It will also continue to engage with the FCA as it progresses work around the proposed FCA-led remedies. 

Approach to DMRs

A respondent to the consultation noted that the DMRs replicate CONC requirements and that unauthorised credit brokers would still be subject to these requirements. The Government has chosen not to change the SI drafting regarding DMRs in response to this feedback; instead, it plans to consider this issue as part of phase 2 of planned CCA reform work. The position may therefore be subject to change – though not in the immediate future.

Continued monitoring of large tech and e-commerce platforms

Respondents to the consultation, including consumer groups, raised concerns that large e-commerce platforms might begin to offer their own unregulated BNPL agreements at scale given merchant-provided credit falls outside regulation. However, the Government does not see this as a risk currently but will continue to closely monitor the profile of the merchant-provided credit sector and will respond if significant change or potential consumer harm is detected. Whilst there’s no indication that the Government will change its approach, it’s clear it is prepared to act where a risk does develop in future.

Statutory protections for borrowers

Consumers will have access to the FOS. FOS case fees are currently £650 per complaint (although the first 3 complaints are free). With the average value of a BNPL transaction falling below £100, BNPL firms could be facing disproportionate costs when dealing with complaints. It remains to be seen what approach will be taken by the FOS to fees charged for resolving claims relating to DPC agreements.

As noted, consumers will also benefit from s75 CCA protections. However, those rights will apply to purchases over £100 which is above the average value of a typical BNPL transaction. As a result, there is an increased likelihood that complaints in relation to lower value purchases may be referred to the FOS where customers remain out of pocket. Lenders may therefore be incentivised to offer voluntary equivalent protection for transactions below the s75 thresholds. Where that is the case, lenders will want to ensure that agreements with merchants provide protection for this. Merchants may, however, be reluctant to agree to this where there is a clear financial incentive for lenders to settle claims to avoid escalation to the FOS.

Authored by Aine Kelly and James Black.