The Financial Conduct Authority has a generally wide scope on the regulation of financial services in the United Kingdom. However, some financial services still operate beyond the FCA’s regulation, meaning consumers are unable to benefit from the protection offered by the FCA. For example, unregulated Buy Now Pay Later agreements and short-term interest-free credit are currently regulated by the Consumer Credit Act 1974 and fall within an exemption designed to allow time-limited delayed payments of goods where no interest is charged. 2021 saw a definite change in regulatory direction for these types of credit, with the government announcing its intention to bring unregulated BNPL agreements under FCA regulation on the 2 February. Although deemed to be a fairly low risk option in comparison to other regulated credit agreements, the rising popularity of BNPL agreements due to Covid-19, particularly for online purchases, and the rising cost of living has begun to highlight the potential detriment and risk to consumers. This has encouraged a changing landscape for unregulated BNPL finance and has facilitated a consultation into what changes ought to be made to best regulate these popular forms of consumer credit.
To fall within the exemption from regulation contained in the CCA, the credit must be a borrower-lender-supplier agreement for fixed-sum credit with 12 or fewer payments to be made by the borrower within a period of 12 months or less and the credit is provided interest free and without other charges. This includes unregulated BNPL agreements, short-term interest-free credit and invoices. These agreements are deemed to be of lower risk than other forms of consumer credit due to their short durations, generally low amounts and lack of interest. The original intent of this exemption was to ensure businesses deferring payment for the provision of goods and services were not brought under consumer credit regulation, which would require firms to have regulation status from the FCA in order offer such financial services. The benefit of this is that these payment options can give the consumer more flexibility when selecting how to pay and have gained much popularity in online purchases due to its flexibility and accessibility for firms, growing particularly popular during the Covid-19 pandemic and set to become more popular with the rise in living costs.
Alongside benefits often follow detriments and BNPL finance is no exception. The Woolard Review, published 2 February 2021, highlights a number of potential detriments consumers may face when opting to use BNPL finance and recommended this type of consumer credit be brought under FCA regulation. Potential sources of detriment include marketing and promotion to consumers, misunderstanding and absence of information offered to consumers, absence of requirements to undertake a creditworthiness assessment, potential to create high levels of indebtedness, inconsistency of customers in financial difficulty and impacts on the wider credit market, including little visibility of BNPL finance on a client’s credit file. Although considerably lower risk than other types of consumer credit, unregulated BNPL finance agreements have the potential to cause harm where a client accumulates a number of agreements, or enters an agreement without relevant creditworthiness checks being performed. Not only is there clear potential harm for the customer entering financial difficulties and defaulting on payments, this also presents a problem for firms and lenders who may struggle to reclaim the debt and face additional costs in order to do so. This can be further exacerbated by the ease of entering BNPL and short-term interest-free credit agreements and can easily lead to an accumulation of debt the consumer may struggle to repay.
These detriments highlighted in the Woolard Review have led to a recent government consultation, running from October 2021 and closing in January 2022. This consultation outlines suggested avenues of change the government is considering adopting in order to regulate BNPL finance and reduce the risk faced by consumers. One proposal put forward is to apply the current credit brokering regulations to BNPL finance, which include an application for authorisation to the FCA and ongoing monitoring and disclosure of information to the FCA. However, the cost burden for additional compliance would fall to the business, and may lead to limited consumer choice if businesses elect not to offer BNPL to avoid this additional expense. This would also confer a competitive advantage to larger businesses who will have the resources to continue offering BNPL finance, which would therefore limit customer convenience and payment options throughout the market for consumers. Regarding advertising and promoting BNPL finance, the proposal is to apply the current financial promotions regime, which would require merchants to seek approval from FCA-authorised persons or to be FCA-authorised themselves, once again incurring an additional cost and complication to offer BNPL finance. Conversely, the government believes this would improve due diligence and ensure approving firms have the relevant expertise and FCA authorisation, which would help protect consumers’ interests. There is no current obligation for business offering BNPL finance to conduct creditworthiness assessments, which enables the potential for consumers to accrue debt they may struggle or be unable to repay on time. The government’s proposal to assist in managing this detriment is to apply the current FCA rules to BNPL finance agreements to introduce a clear and consistent way to report BNPL on consumers’ credit files. It is unclear at this stage what form this may take and will likely be decided upon based on responses to the consultation. The current regime may need to be adapted, as will be the case for arrears, default and forbearance, in order to ensure the current rules fit comfortably with the flexible nature of BNPL finance agreements and ensure their continuing relevancy and availability to consumers.
The foreseeable future will certainly harbour a changing landscape into the way BNPL finance agreements are regulated. The most significant change to the regulation of BNPL finance will be bringing it within the FCA’s regulatory regime, ensuring regulation is more adaptable as well as encouraging consumer trust in this form of consumer credit. With popularity of this form of consumer credit set to rise with the increased cost of living and a greater proportion of people facing financial difficulties, ensuring a greater level of consumer protection will be imperative. Although it is unclear what forms changes in regulation will take, it is clear the government intends to preserve the current spirit and quality of BNPL finance, in particular its flexibility and convenience for consumers. To find out the government’s decisions for BNPL finance and short-term interest-free credit, the outcome of this consultation awaits.
Written by Charlotte Read