The consultation asks for stakeholders’ views on whether the draft legislation that has also been published effectively delivers the policy positions set out in the government’s June 2022 consultation response to its October 2021 consultation on policy options to deliver a proportionate regulatory approach. For a reminder of the key points from the consultation response, take a look at this Engage article: Buy-Now Pay-Later: HM Treasury sets out the government's approach to regulating the market.

Scope: final policy position

• The new legislation will apply to agreements that are offered by third-party lenders (ie someone other than the merchant/supplier) and which are currently exempt under article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) (covering both BNPL agreements and other types of interest-free lending including short-term interest-free credit (STIFC)), subject to exemptions for the following arrangements that present less risk of consumer detriment:
  • Agreements financing contracts of insurance: This is to allow for the situation where a third-party, such as a broker, may be involved in the transaction, and where the third-party may provide the facility to enable monthly instalments.
  • Agreements offered by registered social landlords to tenants and leaseholders: This ties in with other regulatory exemptions for registered social landlords, eg a recently introduced exemption from credit broking regulation for registered social landlords where they refer their tenants to social and community lenders.
  • Employer/employee lending: This will maintain an exemption both for agreements where the employer is the lender and those where the employer introduces the employee to a specialist company which then provides the credit.

Other activities, where a third-party lender is not involved in the transaction (eg invoicing and trade credit), don’t require an express provision in legislation as they will remain exempt under article 60F(2) of the RAO.

• All agreements entered into by the merchant as lender (including those made online or at a distance) will remain exempt.
• The draft legislation provides an anti-avoidance mechanism, however, to prevent  lenders acting as merchant under a reseller type arrangement. The government was also previously concerned about the potential for BNPL providers to adopt a running-account model and use the exemption in article 60F(3) of the RAO to escape regulation. It has been persuaded that this is not realistic however, and so this exemption continues unaffected.
• The new approach will apply equally to lending for business purposes. Therefore current article 60F(2) agreements that will be brought into regulation made to individuals and relevant recipients of credit will not be regulated where they are more than £25,000 and wholly or predominantly for business purposes, as they will fall within the existing business lending exemption in article 60C(3) of the RAO.
• The government recognises that its final approach to scope might not capture all the ways in which the BNPL market could develop. It will closely monitor the market to identify whether any new products emerge that could present a risk of widespread consumer detriment, and will take action if necessary.

Regulatory controls that will apply to newly regulated agreements

As set out in the October 2021 consultation and the consultation response, the government considers that article 60F(2) agreements are lower risk than other types of credit. The applicable regulatory controls for those article 60F(2) agreements that will be brought into regulation should therefore be proportionate to the risks that they present, whilst also providing sufficient consumer protection.

The consultation response confirmed the tailored approach to the regulatory controls that the government intends to apply to newly regulated agreements. The current consultation sets out how the proposed approach will be implemented through the draft legislation:

• Credit broking: A new article 36FB in the RAO will ensure that merchants which introduce their customers to newly regulated agreements will remain exempt from credit broking regulation.
• Domestic premises suppliers:  Merchants visiting consumers in their homes will be required to obtain FCA authorisation if they wish to offer newly regulated agreements from a third-party lender as a payment option. Domestic premises suppliers that carry on credit broking activities will be subject to the FCA's full permission regime (reflecting the current regulatory treatment of these merchants, who are subject to the FCA's full permissions regime and cannot rely on the limited permission regime).
• Marketing: To mitigate the risk of potential consumer detriment from promotions made by unauthorised merchants, the draft legislation amends the Financial Promotions Order to require those merchants to obtain approval from an authorised person (which could, but does not have to, be their lender partner) for promotion of agreements which will be brought into regulation. In practice, the government anticipates that third-party lender partners will provide pre-approved materials to merchants as part of their overarching commercial arrangements. The draft legislation will also disapply the Financial Services (Distance Marketing) Regulations 2004 (DMRs) for unauthorised brokers where information is disclosed by authorised lenders in accordance with the FCA's rules on distance marketing for authorised persons. This is to avoid the situation where unauthorised brokers would have to provide information in accordance with the DMRs and authorised lenders would have to provide information in accordance with FCA rules, leading to duplication of information and burdens for the unauthorised intermediaries.
• Pre-contract information: Firms offering newly regulated BNPL agreements will not need to comply with the pre-contract requirements of the Consumer Credit (Disclosure of Information) Regulations 2010 which are made under section 55 CCA. Instead, firms will be required to comply with FCA rules on pre-contractual disclosure of information. The FCA will consult on its proposed rules. This also means that the corresponding sanction of unenforceability without a court order in section 55(2) CCA will not be applicable. If firms fail to comply with the FCA's rules then it can take action under its existing toolkit. Alternatively, a consumer will be able to complain to the firm, make a complaint about the firm to the FOS, or make a claim for damages under section 138D FSMA if they have suffered loss as a result of the rules breach.
• ‘Small agreements’: The government is going ahead with an amendment to the ‘small agreement’ (under £50) exemption to exclude newly regulated agreements, meaning that BNPL loans in scope will be regulated regardless of value.

The transition to FCA regulation – a ‘temporary permissions regime’ (TPR)

The government is proposing the creation of a TPR, designed to enable firms to transfer into the new regulatory regime before seeking full authorisation at a future date.

Firms in the TPR will be deemed authorised under part 4A of FSMA by the FCA, so they will be permitted to undertake the relevant regulated activities relating to newly regulated agreements, and will need to comply with the relevant FCA rules. The FCA will be able to supervise these firms and take enforcement action against them if necessary. The relevant regulated activities will be:

• entering into a regulated credit agreement as lender;
• exercising, or having the right to exercise, the lender's rights and duties under a regulated credit agreement;
• credit broking (for domestic premises supplier merchants that offer newly regulated agreements).

Eligibility for the TPR

Firms which are not currently authorised and who wish to undertake the above regulated activities on or after ‘regulation day’ (ie the day when regulation under the new regime commences) will need to register with the FCA for entry into the TPR before regulation day. Firms will only enter the TPR where they have:

• engaged in an activity (which will become a regulated activity on regulation day) prior to regulation day;
• registered for the TPR prior to regulation day; and
• paid a non-refundable registration fee.

Firms that are already licensed for lending or credit broking (as applicable) will not need to register for the TPR as they will be able to rely on their existing permissions.

The TPR for current providers

The FCA proposes to introduce a TPR for firms already providing credit that will be brought into scope for the first time, to allow them to continue operating whilst they apply for full permission. Any firm that has not registered for the TPR prior to regulation day, and which does not have the appropriate authorisation, will not be able to undertake the regulated activity on or after regulation day. However, firms would be able to continue to service agreements that existed prior to regulation day (which will remain unregulated – see further ‘What about pre-regulation agreements’ below). Firms that have registered for the TPR but who subsequently decide that they do not wish to undertake new business after regulation day will be able to withdraw from the TPR.

During the TPR, firms will be able to continue to enter into agreements and/or broker agreements under their temporary permission until their authorisation application is either approved, refused, withdrawn or if they fail to apply within their designated landing slot.

The FCA's consultation on its proposed rules will provide more detail on how the TPR will work in practice.

‘Retained TPR’ for agreements made post-regulation day where firms leave TPR

The draft legislation provides that lenders that would otherwise exit the TPR will be able to retain a temporary permission for exercising, or having the right to exercise, the lender's rights and duties under a regulated credit agreement under article 60B(2) of the RAO. Those lenders will continue to be deemed authorised for servicing those regulated agreements which were entered into whilst those lenders had a temporary permission for lending. The FCA will continue to supervise, and will be able to take enforcement action against, any firms which retain such a temporary permission. Alternatively, firms will be able to dispose of their loan books to an authorised third-party. The time limit for the duration of this retained temporary permission for servicing agreements will be two years.

What about pre-regulation agreements?

Exempt agreements that were entered into prior to regulation day will continue to be exempt. The draft legislation makes it clear that only agreements made on or after regulation day will be regulated.

Other regulatory controls

In addition to the provisions in the draft legislation, existing elements of the consumer credit regulatory regime will apply to newly regulated agreements. The government confirmed the approach to these elements of regulation in its June 2022 consultation response. However, given that stakeholders have continued to show an interest in these areas, the current consultation summarises the government's policy position:

• Creditworthiness and credit files: Proportionate regulation of newly regulated agreements includes a tailored application of some of the FCA's current rules on creditworthiness assessments. It is for the FCA to decide how the current rules need to be tailored for these products. On credit reporting, the government confirms its view that there should be clear, consistent and timely credit reporting of newly regulated agreements, across the three main credit reference agencies. It also notes that the FCA published an interim report on its Credit Information Market Study in November 2022, which discusses some of the issues that have previously been raised about how BNPL and other exempt agreements will be recorded on credit files. For more on the FCA’s interim report, see this Engage article: Attention lenders: UK FCA proposals to improve the credit information sector.
• Content of agreements: Having carefully considered stakeholder feedback, the government's view is that it is proportionate for the current requirements for the content of agreements set out in the Consumer Credit (Agreements) Regulations 2010 to apply to newly regulated agreements. However, the government is keen to hear stakeholders’ opinions on this approach.
• Arrears, default and forbearance: Some stakeholders had pointed out that the current CCA requirements on post-contractual information, particularly the timing of when this information must be sent, may need to be tailored for BNPL agreements given their sometimes very short-term nature. The government therefore said that it would further consider whether tailored requirements are appropriate. Having carefully considered this, the government's view is that a legislative change to the timings of trigger points at which information must be sent is not necessary. However, this could be considered further as part of the broader CCA reform (see UK Consumer Credit Act 1974: HM Treasury takes first step towards ‘ambitious long-term reform’ for the latest on this).
• Section 75: The government's view remains that:
  • section 75 is a strong and well-known consumer protection measure, and it should apply to newly regulated agreements;
  • the monetary thresholds for section 75 should not be amended for newly regulated agreements, meaning that it will not apply to claims relating to a single item to which the supplier of goods or services has attached a cash price of less than £100 or more than £30,000.
• FOS jurisdiction: The government's view is that proportionate regulation of newly regulated agreements should include the ability for consumers to access the FOS for issues concerning the conduct of lenders. Some stakeholders have raised concerns about the potential disproportionality of the FOS case fee when compared with the typical value of newly regulated agreements. The government comments that, whilst it is for the FOS to consider its case fees, the government continues to engage with the FOS as it prepares its approach.

Next steps

The consultation is open until 11 April 2023 and responses should be sent to: [email protected]. Following this, once the government has considered stakeholder feedback it will consider any necessary changes to the draft legislation and intends to publish a consultation response which will set out the anticipated key milestones for regulation. The government will then lay legislation when Parliamentary time allows, with ‘the ambition that this will be during 2023’.

It is the intention of the government and the FCA that, shortly following the publication of the government's response to this consultation with the final draft legislation, the FCA will publish a consultation on its proposed conduct rules, as well as rules for firms operating on a temporary permission.

Pending introduction of regulation, the FCA is continuing to monitor the BNPL market and will consider any further interventions under its existing powers where it identifies consumer detriment.

In the June 2022 consultation response, many stakeholders raised questions about broader reform of the consumer credit regulatory regime. The government points out that it published a consultation on this broader reform of the Consumer Credit Act 1974 in December 2022. Take a look at this Engage article for more: UK Consumer Credit Act 1974: HM Treasury takes first step towards ‘ambitious long-term reform’.

Please get in touch with any of the listed contacts if you would like to discuss the potential impact for your business.

Authored by James Black and Virginia Montgomery.