However, there has been an evolution in the Treasury's thinking around the scope of the regulatory perimeter, most significantly in the decision to extend the scope of regulation to include short-term interest-free credit (STIFC) agreements when they are provided by third-party lenders (which the Treasury had originally proposed to exempt). The Treasury is also minded to further extend this scope to capture STIFC provided directly by merchants where it is offered online or at a distance, but wants to engage further with stakeholders to fully understand the scale of the merchant-offered STIFC market - responses on this issue are due by 1 August 2022.
- The scope of regulation will capture BNPL and will be extended to other currently-exempt STIFC agreements when they are provided by third-party lenders. This extension is new - the consultation had proposed exempting these agreements from the scope of regulation. This is intended to capture both lending provided to consumers with an overarching relationship with a third-party lender under which multiple low-value agreements are made, as well as single, higher-value discrete agreements taken out with a third-party lender – although the distinction between these types of lending is becoming blurred and less meaningful as lending practices rapidly change.
- The Treasury is minded to further extend this scope to also capture STIFC provided directly by merchants where it is offered online or at a distance, but further stakeholder engagement is necessary to fully understand the scale of the merchant-offered STIFC market.
- Exemptions will be permitted for specific agreements where there is limited risk of potential consumer detriment, and where regulation would otherwise adversely impact day-to-day business activities (for example, monthly instalment payments for annual insurance policies).
- The Treasury remains concerned about the running-account credit exemption and has not yet set out a final position, including whether a legislative change is needed in relation to the running-account exemption to prevent BNPL providers from using it to circumvent regulation. However, charge cards using this exemption will remain exempt.
- The Treasury's approach to regulatory controls for agreements that will be brought into regulation is essentially the same position as was taken in the consultation - the Treasury will tailor the application of the Consumer Credit Act 1974 (CCA) to these products, and the elements of lending practice most linked to potential consumer detriment.
- For the merchant community, the Treasury has confirmed that merchants offering agreements that are brought under regulation will be exempt from credit broking regulation. However, the financial promotions regime will apply to merchants offering BNPL and STIFC products as payment options, which means in practice that merchants will be required to obtain approval for promotions of BNPL products from an authorised person (which could, but does not have to, be their BNPL lender partner).
As noted above, the scope of regulation will capture BNPL as well as STIFC agreements when they are provided by a third-party lender. The Treasury is also minded to extend the scope of regulation to capture STIFC agreements which are provided directly by merchants online or at a distance, given their potential to present the same risks as BNPL agreements and STIFC agreements provided by a third-party lender. This would also ensure that agreements offered directly by large e-commerce merchants would be regulated, and would also mitigate the risk of BNPL providers avoiding regulation by structuring agreements so that they technically become the merchant in the transaction they are financing. An expansion to merchant-provided STIFC could potentially bring into regulation an array of different sectors, including dentistry, healthcare, education, home improvements and maintenance, sports clubs, vehicle repair and potentially SME retailers.
In-store STIFC is viewed as less risky because there is greater friction present during an in-person transaction reducing the risk of debt accumulation and impromptu purchasing.
Comparison with EU proposals
The EU Commission's proposal for a revised Consumer Credit Directive (CCD II) is currently going through the legislative process. The Council of the EU agreed on its general approach in June 2022, while the European Parliament has not yet adopted its negotiating position.
The Commission's proposed CCD II will cover, among others, credit agreements, such as certain BNPL agreements, where the credit is granted free of interest and without any other charges and must be repaid within three months and only insignificant charges are payable. In its compromise text, the Council gives a bit more colour to the scope of regulated BNPL. The Council has proposed in its compromise text that the practice of "deferred payments", which it views as distinguished from BNPL, be excluded from CCD II. Proposed recital 15b sets out the Council's understanding of both practices:
"Buy Now Pay Later schemes, understood as new digital financial tools that let consumers make purchases and pay them off over time, whereby the creditor grants a consumer a credit agreement for the exclusive purpose of purchasing goods or services via the supplier of such goods or services, are often credit granted free of interest and without any other charges, and should therefore be included in the scope of application of this Directive. This should be distinguished from deferred payments, covering the situation where a supplier of goods or services gives time to the consumer to pay for such goods or services, granted free of interest and without any other charges, except for limited charges of non-compliance, without a third party offering credit, which should be excluded from the scope of application of this Directive".
This approach to the perimeter of BNPL provided by third-party lenders is relatively closely aligned with the Treasury's views on scope, although as noted above the Treasury is minded to further extend the scope of regulation to merchant-offered STIFC.
As for merchants, CCD II proposes that Member States should be offered the possibility to exempt suppliers of goods and services who act as credit intermediaries in an ancillary capacity from the requirements of admission and registration. Similarly, in the UK the Treasury has confirmed that merchants offering agreements that are brought under regulation will be exempt from credit broking regulation (unless they undertake home-visit selling practices).
It's clear that the Treasury's thinking remains open-minded on the boundaries of the regime, and stakeholder engagement will be important in shaping the final perimeter - the decision to extend to third-party-provided STIFC was taken after respondents highlighted developments suggesting further convergence between BNPL and STIFC practices. The Treasury will engage with stakeholders to enable a final decision as to whether the scope of regulation should be extended to include STIFC provided directly by merchants online or at a distance, including looking at the proportionality of this approach. Responses on this issue are due by 1 August 2022. A second consultation on draft legislation is expected to be published by the end of the year. According to the latest Regulatory Initiatives Grid, secondary legislation is anticipated in 2023.
There may also be a further opportunity to shape the Treasury's approach to regulation, particularly in relation to transition and the avoidance of duplicative regulatory burdens. Given the new extension of scope to third-party STIFC providers, the Treasury is considering how best to manage the burden of regulatory change on these firms, which tend to be FCA-authorised and offer regulated credit products alongside their exempt lending, and which are likely to apply the same standards and procedures to their unregulated STIFC as they do to their regulated lending. The Treasury is particularly keen to ensure transitioning to a rules-based pre-contractual approach would not impose undue burdens on them, and will consider how to ensure that agreements will be compliant and properly executed should a lender choose to apply the existing CCA requirements for currently-regulated agreements to the BNPL/STIFC agreements which will be brought into regulation.