Buy-Now Pay-Later reform: UK government publishes updated proposals – now over to the FCA

See our Engage article on the initial consultation here: Buy-Now Pay-Later: UK government consults on draft legislation.

Whilst BNPL regulation is clearly a priority for the government, realistically it’s unlikely that BNPL products will be regulated until 2026 at the earliest. BNPL products will become regulated 12 months from the Statutory Instrument (SI) being made (Regulation Day). The draft SI published alongside the consultation will first need to be laid before Parliament.

Whilst the consultation outlines the government’s general approach to regulation, detailed rules must be set by the FCA who will consult and finalise those rules prior to Regulation Day. What BNPL regulation will look like in practice therefore still remains unclear.

Timelines for wider CCA reform remain uncertain with the government promising a separate consultation “in due course”.

Speed read

Principles

The government’s approach has been informed by five key principles:

• consumers must have access to simple, clear, understandable and accessible information;

• consumers should have protection when things go wrong;

• consumers should only be lent to if it is affordable;

• regulation should be proportionate to ensure continued access and choice;

• regulation must be introduced urgently to ensure consumers are protected and the sector has certainty.

Outcomes

Once implemented, the framework the government is proposing will deliver on those principles through the following five outcomes:

• Clear information, in line with the Consumer Duty: The government will disapply certain information requirements in the CCA that could lead to poor consumer outcomes and the FCA will be able to utilise their powers to apply more appropriate disclosure requirements;
• Key statutory rights: Consumers will benefit from key protections in the CCA, such as section 75;
• Independent complaints handling: The FCA will be able to set rules on complaints handling and consumers will be able to take complaints to the independent Financial Ombudsman Service (FOS);
• FCA supervisory oversight: BNPL firms will need authorisation from the FCA and will be subject to ongoing supervision;
• Affordability and creditworthiness assessments: The FCA will be able to set appropriate rules on assessing affordability and creditworthiness, reducing the risk that borrowing is unaffordable.

Key aspects of the proposed regime

The key aspects of the government’s proposals to regulate BNPL products include:

• Scope: Only BNPL agreements offered by third-party lenders will be regulated. Those agreements are referred to as “Regulated Deferred Payment Credit Agreements”. Merchant-provided credit, credit agreements to finance insurance contract premiums and agreements such as those facilitated by employers or Registered Social Landlords will remain outside regulation;

• Anti-avoidance: The draft legislation provides an anti-avoidance mechanism to prevent  lenders acting as merchant under a reseller type arrangement;

• Information requirements: The FCA will design a bespoke disclosure regime and will consult in due course on information requirements. The prescriptive disclosure requirements under the CCA will not apply including in relation to pre-contractual information, agreement content and post-contractual servicing;

• Financial promotions: Financial promotions communicated by unauthorised merchants who offer third-party lender BNPL agreements will need to be approved by an authorised person unless an exemption applies;

• Credit broking: Credit broking activities that relate to BNPL agreements will be excluded from regulation unless the activity is carried out in the home of a customer;

• Section 75 CCA: Consumers will benefit from section 75 protections for purchases of more than £100 or less than £30,000;

• Affordability and creditworthiness assessments: The FCA will be able to set appropriate rules on assessing affordability and creditworthiness;

• Sanctions: CCA sanctions will fall away for BNPL agreements. Robust protections are currently provided under the existing FCA and FOS regimes;

• Access to FOS: Consumers will have access to the FOS to resolve disputes with BNPL providers. The FCA will consult on applying complaint handling rules to BNPL firms;

• Credit reporting: Given FCA proposals for a mandatory data sharing requirement in its Credit Information Market Study, BNPL firms will be required to report data to credit reference agencies;

• Distance marketing: The Financial Services (Distance Marketing) Regulations 2004 (DMRs) will be disapplied for unauthorised brokers where information is disclosed by authorised lenders in accordance with FCA rules on distance marketing. Retailers will not be in breach of the DMRs if a third-party BNPL firm does not properly comply with FCA distance marketing rules.

• Temporary Permission Regime (TPR): The government will create a TPR, designed to enable firms to transfer into the new regulatory regime before seeking full authorisation at a future date. The FCA will be able to supervise these firms and take enforcement action against them if necessary.

Next steps

Given the need to act urgently and because the government has already consulted on most of the proposals, the consultation will be open for a relatively short period of 6 weeks. Responses should be submitted by 11:59pm on 29 November 2024 and should be sent to [email protected].

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

Commentary

Overall, the proposals appear to be sensible, striking a balance between the need for consumer protection whilst taking a proportionate approach to regulation and the practical implications for regulated firms. The government’s approach remains largely consistent with the previous approach consulted on with the exception of a few key areas, for example, in relation to agreement content requirements, which will be a welcome change for BNPL firms.

• Information requirements: The government has acknowledged that agreement content requirements were the most contentious aspect of the previous approach consulted on. It has listened to the concerns raised by the BNPL industry and now proposes to switch off CCA information requirements more generally in favour of an FCA rules-based regime.

What information will need to be provided to consumers in practice remains to be seen and the FCA will consult on that in due course. The FCA could, in theory, take a prescriptive approach setting out detailed information requirements within the Consumer Credit sourcebook (CONC). In the world of Consumer Duty (and noting its recent call for input on retail conduct requirements following introduction of the Duty), the FCA may, however, prefer to take a higher level approach focussing on consumer outcomes and the need to ensure adequate consumer understanding in firms’ communications with consumers. If that is the case, firms could adopt very different approaches to the provision of information which could in itself be problematic.

• Statutory rights: Consumer groups are likely to welcome the application of section 75 CCA rights to BNPL agreements. However, those rights will apply to purchases over £100 which is above the average value of a typical BNPL transaction. This raises the question as to whether firms will go beyond this and offer voluntary equivalent protection for transactions below the section 75 thresholds which is the approach taken by many other firms facilitating retail payments.

• Complaints handling: The BNPL industry may be concerned about a consumer’s ability to escalate a complaint to the FOS. FOS case fees are currently £650 per complaint (although the first 3 complaints are free). With the average value of a BNPL transaction below £100, BNPL firms could be facing disproportionate costs when dealing with complaints.

• Private right of action under FSMA for Consumer Duty breaches: The government has noted that there are robust consumer protections in place under the proposed regime which provide strong incentives for firms to comply with requirements including the private right of action under section 138D of the Financial Services and Markets Act 2000 (FSMA) for CONC breaches.

In its current form, there is no provision for a private right of action under section 138D FSMA in respect of Principle 12 (the Consumer Duty). Claimants bringing civil claims will need to point to specific CONC rule breaches to bring a private action under that provision. If the FCA chooses not to take a prescriptive approach to rule making and instead relies on the broader requirement to comply with the Consumer Duty, this option may not be available to consumers.

• Withdrawal rights: Under the current proposals, the borrower’s right to withdraw from a credit agreement within 14 days under section 66A CCA will be retained for BNPL products. In relation to online purchases, the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 give customers a 14 day cancellation right in relation to the goods purchased. Where BNPL is used as a payment method, customers will therefore have both a right to cancel the purchase as well as a right to withdraw from the credit agreement. Whilst cancelling the agreement for the goods will automatically cancel the agreement for credit, the goods will not automatically be cancelled where the borrower withdraws from the credit agreement. This creates quite a complex situation which may be difficult to explain to the average borrower. In the context of a short term credit agreement, it may make sense to also disapply section 66A CCA.

The UK position vs CCD II

The UK government has opted not to follow the European position taken in relation to the Second Consumer Credit Directive ((EU) 2023/2225) (CCD II) where third party BNPL lending is now caught within the expanded scope. Under CCD II, firms will also be required to provide prescribed pre-contractual information and will be subject to various other ongoing information requirements.

For more information on the impact of CCD II on BNPL firms, see our Engage article: EU Second Consumer Credit Directive: Scope and impact for buy-now pay-later (BNPL) providers.

Detailed proposals

• Scope
• Information requirements
• Sanctions
• Regulatory controls
• FOS
• Other changes
• Temporary Permission Regime (TPR)

Scope

To ensure low-risk credit agreements are not captured by regulation, the government has maintained its original proposal to regulate BNPL agreements by third-party lenders only. Those agreements are referred to as “Regulated Deferred Payment Credit Agreements”. Merchant-provided credit will remain exempt under article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

Respondents noted that this approach could lead to potential competition issues as Big Tech and larger merchants have the ability to develop and offer unregulated agreements at scale. Smaller merchants, on the other hand, are reliant on third party lenders to offer credit which is then captured by regulation. Consumer groups noted the need for close monitoring of the market to prevent consumer harm from crystalising where unregulated agreements are offered at scale. The government has committed to monitoring developments in the merchant provided credit sector closely and will act if it sees evidence of significant growth in the market or significant potential for harm to consumers.

There was broad support for the government’s proposal to exempt specific agreements presenting a lower risk of consumer detriment, including agreements financing contracts of insurance, those offered by registered social landlords to tenants and leaseholders, as well as employer/employee lending. Reflecting feedback from one respondent, the government has expanded the exemption for arrangements facilitated by employers so that it now also covers entities in the employer’s wider group.

The draft legislation also provides an anti-avoidance mechanism to prevent  lenders acting as merchant under a reseller type arrangement. 

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Information requirements

Sensibly, the government has maintained its proposal to disapply section 55 CCA and the requirements on the form and content of pre-contractual information. Instead, firms will need to comply with FCA rules. Unsurprisingly, BNPL firms were supportive of this approach.

The government’s initial proposals in relation to the content of agreements were the most contentious for BNPL firms who expressed strong disagreement with the initial proposal to apply CCA requirements. These firms thought that the CCA requirements on the content and execution of agreements were disproportionate, overly burdensome and would severely impact the BNPL customer journey, while also being of little material benefit for consumers given their length and inaccessibility. The government therefore believes that a more consumer-focussed pre-contract and contractual disclosure regime can best be delivered by disapplying all of the relevant information requirements within the CCA. The FCA will be able to consider whether and how existing CONC and FCA Principles should apply for BNPL and whether further rules are needed.

In a move that will no doubt be welcomed by BNPL firms, a similar approach has been taken to post-contract servicing. CCA requirements in relation to statements, copy agreements, arrears, default and termination will be disapplied in favour of an FCA rules-based regime.

The government noted that some of these provisions are particularly unsuited to BNPL agreements as BNPL primarily operates in the digital space. For example, CCA default notices must be sent in paper form and statements in a prescribed form are arguably unnecessary where digital accounts allow consumers to keep track of their payments online.

Some consequential amendments to the CCA have been proposed to ensure that key borrower protections remain despite switching off some linked provisions. For example, consumers can apply for a Time Order in broadly the same circumstances as they would be able to for typical regulated agreements (section 129 CCA) and lenders will be required to apply for a court order if they wish to take certain enforcement action following the death of the debtor (section 86 CCA).

The government has separately committed to considering provisions on default and arrears more holistically as part of CCA reform in light of stakeholder concerns about the efficacy of default, arrears and termination requirements in the CCA for a wider range of credit products.

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Sanctions

One consequence of disapplying CCA information requirements is that some of the sanctions under the CCA for breach of those requirements will fall away. For example, unenforceability of the agreement without a court order, unenforceability while the breach continues and disentitlement to interest and charges.

The government has noted that these sanctions are less relevant to BNPL agreements, given they are shorter-term, interest free and generally lower value. In any case, there are robust consumer protections in place under the proposed regime which provide strong incentives for firms to comply with requirements, including:

• FCA oversight and its enforcement toolkit;
• CONC requirements and the private right of action under section 138D of the Financial Services and Markets Act 2000 (FSMA) for CONC breaches;
• the Consumer Duty;
• the FOS.

Whilst some stakeholders took the view that CCA sanctions are important to provide a strong deterrent against breaches, the government has taken the view that these can fall away without a significant impact on consumer protection.

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Regulatory controls

The draft SI also sets out the CCA and non-CCA regulatory controls that should apply to newly regulated BNPL products.

• Credit broking: The government has retained its original proposal to ensure that merchants which introduce their customers to newly regulated agreements will remain exempt from credit broking regulation unless the activity is carried out in the home of the customer. The government has concerns that regulating these merchants would impose significant costs on retailers and possibly lead them to cease offering BNPL.
• Financial promotions: The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 will be amended to require financial promotions communicated by unauthorised merchants who offer third-party lender BNPL agreements to be approved by an authorised person unless an exemption applies. However, the government has noted that in practice BNPL providers may prefer to issue their own financial promotions for use by merchants with whom they partner.

The majority of responses to the consultation agreed with this position and some highlighted the importance of the financial promotions regime to mitigate consumer detriment. However, some respondents were concerned about the impact of the FCA’s new financial promotions gateway.

For more information on the gateway see our Engage article: UK: A short guide to the FCA Financial Promotion Gateway.

• Distance marketing: The government has maintained its proposal to disapply the DMRs for unauthorised brokers where information is disclosed by authorised lenders in accordance with FCA rules on distance marketing. However, to address concerns raised in response to the initial consultation, the government has altered the draft legislation to make it clear that retailers will not be in breach of the DMRs if a third-party BNPL firm does not properly comply with FCA rules on distance marketing.
• Section 75 CCA protection: In response to calls from consumer groups, under the draft SI, consumers will benefit from section 75 protections for purchases of more than £100 or less than £30,000.
• Creditworthiness and affordability assessments: A key priority for the government, as evidenced by its key principles and outcomes, is that credit must be affordable for consumers. The government has confirmed that the FCA will be able to set appropriate rules on assessing affordability and creditworthiness, reducing the risk that borrowing is unaffordable.
• Credit reporting: The government believes it is important for all consumer credit firms to report data on their customers’ agreements to credit reference agencies to support responsible lending practices. It noted that the FCA’s proposals for a mandatory data sharing requirement in its Credit Information Market Study will be a positive step and beneficial to BNPL users once BNPL is under FCA regulation.

See our Engage article: Credit information: UK FCA publishes final report with remedies package for improving the market.

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FOS

Consumers will have access to the FOS to resolve disputes with BNPL providers. The FCA will consult on applying complaint handling rules to BNPL firms in due course.

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Other changes

• Small agreements: The majority of respondents agreed that the small agreement provisions under the CCA should be disapplied for BNPL agreements. The CCA definition of a “small agreement” (for credit not exceeding £50) will therefore be updated to exclude newly regulated BNPL agreements. Despite the government disapplying specific CCA provisions for BNPL, it felt this amendment was necessary to ensure consistency between BNPL agreements above and below £50.
• Voluntary compliance with disapplied CCA provisions: Many lenders voluntarily comply with CCA requirements in relation to unregulated agreements where they offer both regulated and unregulated lending. This allows them to simplify internal systems and processes. The government wants to ensure that lenders can continue with this practice provided information is presented in a clear, fair and not misleading manner that also complies with relevant FCA rules. The government has chosen not to make legislative provision to allow for this and stakeholders agreed that no legislation was needed for this practice to continue. It will be for the FCA to decide whether this is consistent with its rules.

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Temporary Permission Regime (TPR)

The government has maintained its proposal to create a TPR, designed to enable firms to transfer into the new regulatory regime before seeking full authorisation at a future date.

Broadly, stakeholders supported a TPR to enable an orderly transition to regulation. Some stakeholders, particularly consumer groups, were supportive on the basis that a TPR would allow regulation to commence as quickly as possible.

As with other TPR regimes, it’s likely that firms will be given a landing slot for their full application and so will need to be prepared to submit their application in a timely manner.

During the TPR, the FCA will be able to supervise these firms and take enforcement action against them if necessary. As a result, these firms would be permitted to undertake the relevant regulated activities relating to newly regulated agreements and would need to comply with the relevant FCA rules. The relevant regulated activities will be:

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

The FCA's consultation on its proposed rules will provide more detail on how the TPR will work in practice and when applications for full permission need to be made.

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Authored by James Black, Julie Patient, Aine Kelly, and Virginia Montgomery.