The UK government presents plans to regulate the “buy now, pay later” sector

Under Article 60F (2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), short-term loans such as BNPL used to finance the purchase of goods and services are exempt from regulation as long as there is an agreement in place over a fixed amount that must be repaid within 12 months in the amount of a maximum of 12 repayments.

The advice covers goods that were purchased under unregulated BNPL agreements between a customer and a retailer, for example in the fashion industry, where a payment is divided into several equal installments. FCA data shows the sector is growing rapidly in value.

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

The consultation outlines options for extending regulation to the BNPL market, considering two main options: restricting regulation to interest-free loan agreements where a third party lender is involved in the transaction, while agreements are made directly between a dealer and exempted a consumer from regulation; or definition of a BNPL arrangement as an arrangement in which there is a pre-existing, overarching relationship between the lender and the consumer.

The government said the first option was risky to be too large in scope, even though it would capture the riskiest of agreements. The second option, however, left open the possibility of a small change in the BNPL products to make them more similar to a current account balance in order to avoid regulation.

In seeking a proportionate solution that would reduce harm, the government said it was careful not to restrict consumer choice or to give larger retailers an unfair competitive advantage. Accordingly, they do not want to require that dealers who offer BNPL, as credit brokers, be subject to FCA regulation.

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

Pinsent Masons’ financial services expert Andrew Barber, the law firm behind Out-Law, said the advice was important.

“Many companies rely on the exemption of Art. 60F (2) RAO to finance the purchase of their goods and services with the short-term interest-free credit business model. Consumers are also increasingly relying on this model for financing higher-quality products, subscriptions or season tickets. The potential impact of this consultation is therefore far-reaching and companies should be aware of the potential legal, regulatory and commercial consequences of the proposed changes, ”said Barber.

Pinsent Masons financial services expert Rachael Preston said, “The government needs to ensure that regulatory boundaries are carefully drawn to balance the need for consumer protection without stifling customer choice, competition or innovation in the marketplace. To this end, proportionality will be crucial to ensure that regulation in this area does not have unintended consequences. ”

Preston said the consultation and possible launch of BNPL products is in line with efforts by the FCA and other regulators to better protect vulnerable customers.

“Indeed, poor understanding of BNPL products, lack of affordability ratings, and inconsistent treatment of customers in financial distress are new trends in this market. For many, the proposals will be a welcome change and will be more aligned with the regulatory approach of the broader consumer credit market, ”said Preston.