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The Government has published its long-awaited consultation on the regulation of buy-now pay-later (BNPL), following the Woolard Review earlier this year. In summary, the Government says it is committed to introducing balanced and proportionate regulation of BNPL. The consultation, which is open until 6 January 2022, seeks views to inform final decisions about how that regulation should take shape.
We summarise below the key points identified in the BNPL consultation. We then provide our views from a wider payments and consumer protection perspective in light of the wider developments in the payments space.
One headline point is the suggestion that connected lender liability should be included in BNPL regulation – as currently provided under section 75 (Section 75) of the Consumer Credit Act 1974 (CCA) for debtor-creditor-supplier agreements.
In a busy month for payments news:
The consultation explores two parameters: 1) the scope of BNPL regulation, and 2) proportionate regulatory controls for BNPL. The overarching theme is that the Government intends to introduce proportionate legislation that minimises the risk of the regulatory impact being extended unintentionally.
BNPL agreements currently fall within the exemption under Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). As a result, they are not regulated credit agreements under the CCA. Other forms of short-term interest free credit also fall within this exemption (such as interest free instalment loans repayable within a year – which may finance the purchase of more expensive goods or allow for payment of club memberships or season tickets over a year).
The Government acknowledges that, whilst such other forms of short-term interest free credit potentially share some of the same potential consumer detriments as BNPL, they do not share all of the same risks as BNPL. As a result, and subject to further evidence, it is minded to keep such credit agreements outside the new regulatory sphere.
The consultation acknowledges that there is a balance to be struck in how it effectively introduces this change. If the line is drawn too widely, it may catch these other forms of currently exempt agreements. But if is drawn too narrowly, the BNPL product could be easily tweaked to become more like a running-account credit (and may then benefit from the exemption under Article 60F(3)of the RAO). Views are invited on these issues.
In outline, the Government’s present thinking is as follows:
The consultation acknowledges that the average BNPL agreement is for £65 - £75. Therefore, a significant number of transactions will fall below the current £100 lower financial threshold for Section 75 to apply. We will need to await the detail to understand how the Government proposes to deal with this.
If Section 75 (or similar) protection is extended to all BNPL agreements, this may act as a further incentive for consumers to use BNPL as a form of payment. It may also provide customers with greater protection than other emerging forms of retail payments. For example, with interbank payments (which remain nascent in the retail space), there is currently no equivalent form of purchaser protection.
As outlined in our article on the PSR’s review of consumer protections in interbank payments, the PSR has opted not to intervene at this stage – preferring a market-driven approach to ensure consumers are effectively protected. But the PSR and the Government both recognise that greater protection for consumers when making purchases via Faster Payments is needed.
Unlocking Open Banking to allow consumers to pay for goods and services in shops and online via their accounts remains a priority area for the Government, regulators and the Industry – as reiterated in the Payments Landscape Response: the Government wants greater competition and choice between payments networks – beyond the use of credit and debit cards.
As also outlined in the Payments Landscape Response, the Government’s view is that Faster Payments rules addressing reimbursement and liability on all scheme participants will need to be introduced, alongside other measures, to address the growing issue of authorised push payment scams.
Of course, such greater protection comes with an increased cost to the provision of these alternative forms of payment. The economics of these steps must be carefully considered – in the regulation and rules governing both BNPL and Faster Payment – and balanced against the need to ensure there is consumer trust in these payment models.
The use of BNPL by consumers has grown exponentially over the last 18 months. Appropriate and proportionate regulation is overdue and the provisional views expressed in the consultation are generally likely to be welcomed by the retail and financial services industries. We will, of course, need to await the detail following the closing of the consultation to assess how the new regulation will look in practice.
With the likely application of creditworthiness assessments, and the proposed referral rights to the FOS, BNPL providers will need to ensure their systems and processes are designed to address the obligations under CONC. Otherwise, they may find themselves on the end of a number of irresponsible lending complaints.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions
01 November 2021
Insights 22 DECEMBER 2021