On February 14, HM Treasury gave the world a Valentine’s Day gift by announcing the commencement of its eagerly awaited consultation on the future regulation of the buy-now-pay-later (“BNPL”) sector. The Financial Conduct Authority (FCA) may regulate BNPL firms in accordance with the guidelines outlined in the consultation.
If the proposed legislation is passed, businesses that sell BNPL products would be subject to regulation.
- 0% interest and repayable in 12 or less installments over the course of no more than 12 months
- provided by a person who is not the one who is supplying the products 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 proposed legislation establishes a “anti-avoidance mechanism” by prohibiting pre-arranged sales of goods or services to a lender (i.e., the lender owns the products at the time the consumer enters into their credit arrangement and is not a “third-party” in the transaction).
Companies who provide BNPL agreements will need to get authorisation from the FCA. Businesses must likely submit an application for one or more of the following:
- Entering into a regulated credit agreement as lender
- Making use of, or being able to make use of, the lender’s obligations and rights under a regulated credit agreement.
- Credit arranging (for domestic premises supplier merchants that offer regulated agreements)
The consultation also outlines the draught legislation’s implementation of the suggested strategy;
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
Retailers will need to seek FCA full approval and credit broking licence before marketing BNPL products from third-party lenders in clients’ homes.
Financial Promotions
According to the proposed legislation, in order to promote agreements that will become regulated, merchants that are excluded from the changes under the Financial Promotions Order must first receive authorization from an authorised person.
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Pre-contract information
Businesses that offer BNPL agreements must abide by FCA regulations regarding pre-contractual information disclosure.
Small agreements
According to the consultation, the “small agreement” (under £50) exemption will be changed to exclude newly regulated agreements, indicating that all BNPL loans included in the scope will be subject to regulation regardless of their value.
Creditworthiness
According to the consultation, the FCA will need to modify its current creditworthiness assessment regulations in order to regulate BNPL. According to the suggestion, the regulator should determine how the current rules should be adjusted to accommodate BNPL.
Financial Ombudsman Service
By making BNPL agreements regulated instead than unregulated, consumers would have the option of taking their grievances to the Financial Ombudsman Service.
Temporary Permissions
The consultation suggests implementing a Temporary Permits Regime (TPR), as we witnessed with the transfer of Consumer Credit in 2014 and Claims Management in 2019. This will provide BNPL companies temporary authorization to keep operating until they receive full FCA authorization. Prior to the FCA assuming control over regulation, exempt agreements already in place will remain exempt.
Consultation
The consultation period will last eight weeks and end on April 11, 2023. HM Treasury will review any necessary amendments to the draught legislation after taking into account the consultation comments, and it will then issue a consultation response outlining the anticipated key dates for BNPL regulation. The legislation will then be presented to Parliament with the intention of having the amendments implemented by 2023.
Related:
- BNPL: Buy Now Pay Later changes making more FCA Enforcement Powers
- FCA warns Buy Now Pay Later firms about misleading adverts
- Financial Promotions: CONC Introduction
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