UK government sets out plans for regulation of buy now pay later sector

The regulation of BNPL consultation (40 page / 419KB PDF) follows the UK government’s announcement in February 2021 that it was bringing unregulated, interest-free BNPL products into regulation, due to the risk of consumer harm highlighted in a Financial Conduct Authority (FCA) review by Christopher Woolard (68 page / 1.16MB PDF) of the unsecured credit market.

As well as asking stakeholders for their views on the potential scope of regulation, the government is seeking views on a range of regulatory controls that could be put in place for BNPL, to focus on the elements of lending which are most closely linked to consumer detriment.

According to article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), short-term credit such as BNPL that is used to finance the purchase of goods and services is exempt from regulation so long as there is an agreement for a fixed sum, to be repaid within 12 months, by way of no more than 12 repayments.

The consultation covers goods bought under unregulated BNPL agreements between a customer and a retailer, for example in the fashion sector, where a payment is split into several equal instalments. FCA data shows the value of the sector is growing rapidly.

Although the Woolard review identified a number of potential areas for consumer harm, including a misunderstanding of BNPL products, and the absence of creditworthiness assessments, the government said there was limited evidence for these sources of detriment. It said it hoped the consultation would build better understanding of how consumers can be harmed.

The consultation sets out options for extending regulation to the BNPL market, with two main options under consideration: restricting regulation to interest-free credit agreements where there is a third-party lender involved in the transaction, while keeping arrangements directly between a merchant and a consumer exempt from regulation; or defining a BNPL agreement as one where there is a pre-existing, overarching relationship between the lender and consumer.

The government said the first option risked being too wide in scope, although it would capture the riskiest agreements. However, the second option left open the possibility of a small change to BNPL products to make them more similar to running-account credit, in order to avoid regulation.

While looking for a proportionate solution that would reduce harm, the government said it was anxious not to limit consumer choice or give larger merchants an unfair competitive advantage. Accordingly, it said it did not want to require merchants offering BNPL to be subject to FCA regulation as credit brokers.

The consultation also asks stakeholders for their views on the amount and form of pre-contractual information required for BNPL agreements, whether creditworthiness assessments should be required, and how customers in financial difficulty should be treated.

Financial services expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said the consultation was significant.

“Many businesses rely on the exemption in Article 60F(2) of the RAO to finance the purchase of their goods and services using the short-term interest-free credit business model. Equally, consumers are increasingly relying on this model to finance higher value products, subscriptions or season tickets. The potential ramifications of this consultation are therefore wide-sweeping, and businesses should be alert to the potential legal, regulatory and commercial consequences resulting from the proposed changes,” Barber said.

Financial services expert Rachael Preston of Pinsent Masons said: “The government must ensure that the regulatory boundary is carefully drawn to balance the need to protect consumers, without stifling customer choice, competition or innovation in the market. To that end, proportionality will be key in ensuring that regulation in this space does not have unintended consequences.”

Preston said the consultation and the potential introduction of BNPL products was in line with efforts by the FCA and other regulators to better protect vulnerable customers.

“Indeed, poor understanding of BNPL products, lack of affordability assessments and inconsistent treatment of customers in financial difficulty have been emerging trends in this market. For many, the proposals will therefore be a welcome change and will more closely align with the approach to regulation of the wider consumer credit market,” Preston said.