In February 2021, Her Majesty's Treasury (HMT) announced its intention to regulate interest-free Buy Now Pay Later (BNPL) credit products. Shortly after HMT's Consultation Paper on the Regulation of BNPL ("the CP") was published, we put together an insight article summarising the background and the key proposals.
The consultation period closed on 6 January 2022 and in June 2022, HMT published its Response to the Consultation ("the Response"). The overall policy options remain largely unchanged from those summarised in our previous article but the potential scope of regulation is still unclear, albeit the Government has indicated that it is minded to extend the scope that was originally envisaged in the CP. In this Insight, Sushil Kuner from our Financial Services Regulatory team, summarises the key responses on the scope of regulation and highlights the Government's next steps.
Scope of Regulation
The CP drew a distinction between BNPL and 'Short term interest free credit' (STIFC) as follows:
- BNPL – usually taken out online with consumers having an overarching relationship with a third-party lender, under which multiple low value agreements are made, with little transactional friction as a result.
- STIFC – frequently used in-store, with consumers taking out a single, higher-value discrete agreement with the credit provider, who may be a third-party lender or the merchant itself. These are a more traditional form of credit, which have operated for many years without raising significant concerns.
Recognising the benefits which BNPL and STIFC can deliver to consumers, namely cost free access to short term credit and the ability to 'try before you buy', the Government made it clear that the scope of regulation should be proportionate, so that it targets those products with the potential for consumer detriment, but does not impede the provision of useful financial products. In its CP, the Government set out that it was minded to focus the scope of regulation on BNPL only (as defined above), given that there was little evidence of consumer harm arising from STIFC and the fact that it is a long established form of credit.
However, given the limited information on agreements which use the exemption within Article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (see our earlier Insight) ("the Article 60F Exemption"), the Government sought views to test its understanding of the use of the exemption; including the features and extent of lending which utilises the exemption, the potential for consumer detriment to arise from different products and implications for the proposed scope of regulation.
Some of the respondents to the CP pointed out developments in the credit market which blur the distinction between BNPL and STIFC, including:
- BNPL providers offering higher value agreements that are more typically a feature of STIFC agreements;
- greater use of BNPL in person rather than the online e-commerce setting which the Government had considered a key feature of BNPL, and conversely, STIFC providers increasingly lending more online (where there is lowered friction) rather than in-store;
- STIFC and BNPL agreements being increasingly used to finance similar types of goods and services and potentially offered to consumers alongside each other at checkout; and
- STIFC generally appearing to have some of the same potential risks for consumer detriment as BNPL.
The CP set out two possible ways for a distinction to be drawn between BNPL and STIFC in regulation, if evidence from stakeholders concluded that a distinction should, in fact, be made. These were:
- restricting the extension of regulation to interest free credit agreements where there is a third party lender involved in the transaction and keeping arrangements directly between a merchant and a consumer exempt from regulation; and
- defining a BNPL agreement as one where there is a pre-existing overarching relationship between the lender and consumer - for example, where a consumer opens an account with a lender, under which the lender may then agree to finance one or more transactions but where any repayments are toward specific agreements made as part of that relationship.
However, respondents identified challenges with both approaches:
- the potential for large e-commerce retailers to begin offering credit themselves in the future and at scale, without relying on third-party lenders, exposing consumers to similar risks as there are with currently unregulated BNPL; and
- a risk that BNPL lenders could change their business models to avoid regulation - for example, BNPL lenders synthetically structuring transactions so a lender purchases goods immediately from the merchant, legally becoming the seller of the goods itself.
Having considered the feedback from respondents, the Government is now minded to extend the scope of regulation to reflect:
- the increasing similarities in the key features and real-world usage of BNPL and STIFC, which demonstrate the need for consistent protections for products with the potential to be offered alongside each other;
- the potential future development of STIFC and BNPL markets further blurring the boundaries between these products; and
- the diminishing distinction between BNPL and STIFC, which increases the need for consumer clarity on the rights and protections they can expect.
The Government is, subject to further consultation, now proposing that the scope of regulation will capture:
- both BNPL and STIFC agreements when they are provided by third party lenders; and
- STIFC agreements that are provided directly by merchants online or at a distance, given their potential to create the same risks as BNPL agreements and STIFC agreements provided by a third party lender. This would 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 that they are financing.
HMT is not, therefore, currently proposing to capture STIFC provided directly by merchants in-person or in-store due to a perception that such transactions do not carry the same level of risk as agreements provided directly by merchants online or at a distance. The core arguments to support this view are that there is greater friction during in-person transactions, which reduces the risk that consumers accumulate debt across multiple agreements, and consumers are less likely to make impromptu purchases using credit that they otherwise would not have made. Therefore, regulating such agreements does not, at present, appear to the Government to be proportionate.
In addition, due to respondents' views that some arrangements that currently benefit from the Article 60F Exemption do not present a substantive risk of consumer detriment - and regulation would likely hamper day-to-day lending and the provision of useful forms of credit - the Government is proposing to ensure that the following types of arrangement will continue to be exempt from regulation:
- interest free agreements which finance contracts of insurance;
- charge cards;
- trade credit; and
- employer / employee lending.
To enable a final decision to be made about the inclusion of merchant-provided STIFC provided online or at a distance, the Government is undertaking further stakeholder engagement to develop its understanding of this part of the market. The Government is welcoming additional insight from stakeholders on:
- Scale – including the potential number of merchants providing STIFC themselves, both in-person, or online, or at a distance and the types of sectors they operate in; and
- Operation – including the way in which merchants administer and manage the provision of STIFC.
Stakeholders are invited to provide further information to firstname.lastname@example.org by Monday 1 August 2022.
Following this period of stakeholder engagement, the Government will make a final decision as to the scope of regulation and will set out its final position alongside a consultation on the draft legislation which the Government aims to publish by the end of 2022.
To discuss any of the points raised here further, please contact Sushil Kuner in our Financial Services Regulatory team.
 Article 60F(2) sets out an exemption for short term interest free credit agreements. To benefit from this exemption, the agreement must be a borrower-lender-supplier agreement for fixed-sum credit, the number of payments to be made by the borrower is not more than 12, those payments are required to be made within a period of 12 months or less; and the credit is provided without interest or other charges. Article 60F(3) sets out a similar exemption but in relation to running-account credit.