United Kingdom: Buy-Now-Pay-Later products to be regulated in the UK

In brief

Five months after it was commissioned, and just three months after the call for input, the FCA has published the final report from the Woolard Review into change and innovation in the unsecured credit market. The Review concentrated on how regulation can better support a healthy unsecured lending market, taking into account the impact of COVID-19 on employment security and credit scores, changes in business models and new developments in unsecured lending, including the growth of unregulated products in retail and the workplace. Twenty-six recommendations for improvement are included in the final report. Key among them is that "[a]s a matter of urgency", the FCA should work with HM Treasury (HMT) to ensure the necessary amendments to legislation are made to bring Buy-Now-Pay-Later (BNPL) products within the scope of consumer credit regulation.


Contents

This is because the Review found that there is a risk of consumer harm through a lack of affordability assessments. BNPL products provide cost-free, easy access to credit for those who can afford to pay on time, help to manage personal finances by spreading costs, and are significantly cheaper than most other forms of alternative credit. However, the Review raised concerns that consumers do not adequately consider affordability on their own part as they do not tend to see BNPL as credit and often more closely associate it with payment technologies like debit cards. Further, there is also a risk that the retailer as "target customer" of the BNPL provider will lead to consumer harm, by leading to a customer journey designed to drive sales without due consideration for affordability. The Review found that most BNPL providers complete a very basic credit assessment, but that this is focused in the main on credit risk rather than affordability. However, affordability assessments and credit limits may have limited impact in a market where retailers can offer consumers access to multiple BNPL offers from various providers.

Proposed BNPL framework

Although details of the regulatory framework have yet to be released for consultation by HMT, it is clear that some form of credit information reporting will be established to allow for better affordability assessments across the industry, with reporting requirements likely to be imposed on BNPL providers. However, recognizing that BNPL products are comparatively less risky than other high cost credit products and for some consumers can be useful in managing finances, the Review is also clear that, in establishing the detailed regulatory requirements to be applied to BNPL products and providers, the FCA will need to develop a proportionate framework including addressing how credit information should work within this market.

It is likely that information and disclosure requirements will also form part of the BNPL regulatory framework. The Review found that key consumer information is presented in inconsistent ways, and BNPL providers take a variety of approaches to late payments, defaults and collection practices. Additionally, retailers present BNPL options in a variety of different ways at online checkouts, and this key information is not always clear, sometimes hidden in terms and conditions pages without the ability to compare against other options. Addressing information and disclosure requirements is also likely to be a key issue in the forthcoming regulatory framework given that some BNPL providers are looking to expand to in-store use. BNPL providers and retail partners will also need to ensure in-store staff are not incentivized to encourage inappropriate use of BNPL products. This area will be one to watch when the FCA sets out its proposals in due course for the BNPL sector.

Given the UK's relativity onerous credit regime, HMT's statement that its new rules will be proportionate will be welcomed by the BNPL market, as some in the industry are concerned that HMT could fully apply the Consumer Credit Act 1974 (CCA) to interest-free BNPL agreements - which could have a significant impact on the online customer journey. For example, customers would need to be provided with pre-contractual information in the form prescribed by the CCA. In our view, HMT should disapply significant amounts of the CCA to ensure proportionality (we note that proposed amendments to the Financial Services Bill give HMT the power to disapply CCA provisions in relation to interest-free BNPL products).

Retailers 

Once BNPL agreements are brought within the regulatory perimeter, retailers presenting BNPL options will need to be authorized for credit broking. A number of the harms set out above relate to the presentation of the BNPL offers which, in most cases, will be on a retailer’s website. While major retailers offering regulated credit will already be authorized by the FCA, hundreds of smaller retailers will be brought within scope, and the application of the regulatory regime will need to be appropriate and proportionate. One option may be for retailers to become appointed representatives (ARs), with the BNPL providers acting as principal and responsible for ensuring compliance with the relevant rules. However, this would require BNPL providers also to be authorized for credit broking activities (i.e., to enable them to appoint retailers as ARs).

Exclusions

The BNPL regime is expected to exclude low-risk, day-to-day business activities that use the existing exemption from consumer credit regulation for short-term payment deferral, such as gym membership and sport season ticket providers. Other nonfinancial organizations that rely on current exemptions are expected to be excluded, including for example healthcare services. Insurers will be particularly interested in the scope of the exemption - as many rely on this exemption to allow customers to pay premiums on a monthly basis. In fact, the insurance industry heavily lobbied for the number of repayments allowed under the current exemption to be set at 12 (it was originally four).

Next steps 

John Glen, the Economic Secretary to the Treasury, has written to Christopher Woolard responding to the Review, confirming that HMT will formally consult on bringing BNPL products into the regulatory perimeter and take forward legislation to regulate BNPL "as a matter of priority". The FCA has accepted the recommendations of the Review directed to the regulator, and will give further details of its response to the Review when its next Business Plan is published in April 2021, reporting further on its progress in a year’s time.

We anticipate that many of our BNPL clients and other clients potentially impacted by these changes (including retailers) will want to respond to the upcoming consultations on this issue once they are published. We are ready to assist firms with assessing the proposals and responding to the FCA and HMT.  

Contact Information
Kimberly Everitt
Knowledge Lawyer at BakerMcKenzie
London
kimberly.everitt@bakermckenzie.com

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