UK BNPL Consultation and Beyond: Regulatory Impacts on Firms

On February 14, 2023, the UK government launched a consultation on buy now, pay later (BNPL) draft legislation, which will close on April 11, 2023. The consultation aims to gather feedback on a proposed draft of the Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2023 that would give the Financial Conduct Authority (FCA) powers to temporary regulate BNPL products.

The consultation document focuses on the following two forms of credit:

• BNPL is defined as “a type of interest-free instalment credit which allows borrowers to split the cost of purchases into regular repayments not exceeding a 12-month period”. It is usually offered online to consumers by a third-party lender; the consumer often undertakes more low-value BNPL agreements.
• Short-term interest-free credit (STIFC) is mostly offered in-store by a third-party lender or the merchant and usually consumers sign a single, higher-value STIFC agreement. This form of credit has been used for many years and has not raised particular issues from a consumer protection perspective.

The aim of this regulatory analysis is to bring attention to the expansion of the use of BNPL products, with a focus on the UK’s approach. It also provides an overview of other countries’ positions towards this type of product to highlight the main differences in their approaches.

Background

The current UK legal framework, Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, also known as the Regulated Activities Order (RAO), excludes credits, among others, that satisfy the following conditions:

• 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 (beginning on the date of the agreement).
• The credit is provided without interest or other charges.

In September 2020, the FCA commissioned a review of the unsecured credit market, with the aim to make recommendations to the FCA board. In February 2021, “The Woolard Review - A review of change and innovation in the unsecured credit market” presented the outcomes of the review, outlining data that showed the value of BNPL transactions grew “significantly” in 2021, and “more than tripling, nearly quadrupling between January and December 2020”. The FCA’s engagement with some BNPL firms also revealed that the total value of transactions for these firms for 2020 was £2.7bn, representing around 1 percent of the total credit market. However, the review found that overindebtedness and lack of appropriate consumer credit assessments were potential harms to consumers, such as the unaffordability of the credit.

More details about the review can be found here.

On June 20, 2022, the government published a response to its Regulation of Buy-Now Pay-Later: consultation, which had been launched in October 2021. The response confirmed that, after considering stakeholder feedback, the scope of regulation would capture BNPL as well as STIFC agreements where they are provided by a third-party lender.

Additionally, with respect to both BNPL and STIFC agreements, the government concluded that:

• Merchants offering these services as a way of payment would be considered credit brokers and be exempted by the new regulation.
• Related advertising and promotions would be covered by the financial promotions regime.
• Specific provisions in the Consumer Credit Act 1974 (c.39) (CCA), such as those on pre-contractual information (Section 55) to be provided to consumers, would not apply to these agreements.
• Both types of agreements would fall within the Financial Ombudsman Service’s (FOS) competence.

More details on this consultation can be found here.

Buy now, pay later draft statutory instrument

The proposed draft of the Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2023, among other things:

• Amends Article 60F of the RAO, so as to cover both BNPL and STIFC within the meaning of “credit agreement”, as defined by Article 60B(3) of the RAO, and “relevant agreement” under the Financial Services and Markets Act 2000 (FSMA) (Part 3).
• Grants powers to the FCA and the FOS (in relation to its function as operator of the scheme under which certain disputes may be resolved) to make rules prior to the entry into force of the provisions regulating BNPL and STIFC (Part 1).
• Amends the CCA so that “small agreements” within the meaning of the act will not include BNPL and STIFC, and regulations made under Section 55 of the CCA will not apply to them (Part 2).
• Amends the Financial Services (Distance Marketing) Regulations 2004 (SI 2004/2095) to disapply the effect of Regulations 7 and 8 of those regulations for intermediaries of distance contracts (where they are BNPL and STIFC agreements) if the information has been provided by a supplier under the FCA rules on distance marketing (Article 4).
• Amends the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to require that financial promotions in relation to BNPL and STIFC announced by unauthorised persons be approved by an authorised person (Article 5).
• The establishment of transitional provisions and a temporary permission regime to carry out certain regulated activities in relation to the two types of agreements for a limited time (Part 4).

Beyond the UK

European Union

On December 2, 2022, the European Council and the European Parliament reached a provisional agreement on the Consumer Credit Directive. The new version of the directive includes BNPL products (Article 2(1) of the revised directive) within its scope and aims to modernise and enhance the protection of consumers from lending practices “that could lead to over-indebtedness”.

As a next step, the provisional agreement will be subject to approval by the Council and the European Parliament.

In November 2022, the Dutch Authority for the Financial Markets (AFM) released a report on the risks associated with the BNPL industry. Among other matters, the AFM expressed support for BNPL legislation at the European Union (EU) level.

Denmark

In June 2022, the Danish Financial Supervisory Authority (Finanstilsynet) launched a consultation on the bill amending the Consumer Loan Companies Act, the Payment Accounts Act, the Money Laundering Act and various other acts (Part 2), which closed on August 18, 2022.

The bill aims to tackle the issue of over-indebtedness among consumers and, among other things, proposes to exclude BNPL agreements from the application of the Consumer Loan Companies Act. The exception would cover agreements for the purchase of goods or services, free of interest and costs, to be repaid after the conclusion of the agreement, but no later than 90 days after the conclusion of the agreement, offered by the merchants. Instead, the same kind of agreement offered by a third party would fall within the scope of the act. This means that the provider of the credit will be obliged, among other requirements, to hold a licence as a consumer loan company from the Danish Financial Supervisory Authority (Finanstilsynet), carry out a creditworthiness assessment of the consumers who apply to take out such credit, and carry out their business in accordance with fair and good business applicable to them.

Ireland

In April 2022, the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022 was signed into law and came into effect on May 16, 2022. The act, among other things, requires firms providing certain services, including BNPL (indirect credit), to obtain authorisation from the Central Bank of Ireland (CBI) and provides for the application of the Consumer Protection Code 2012, the Minimum Competency Code 2017, and the Minimum Competency Regulations 2017.

Also, in May 2022, the CBI published the Addendum to the Consumer Protection Code 2012 arising from the enactment of the 2022 act. The addendum amends the code by specifying which sections of the code relating to know your customer (KYC) and advertising apply to regulated BNPL agreements.

As stated in the bill digest, “[t]he rationale for the legislation is that the sharp rise of PCPs (in number and value terms) among other forms of car-related (and other) finance has raised concerns over potential financial stability and consumer protection issues”.

Sweden

On November 3, 2021, the Swedish Ministry of Finance published the Committee Directive Dir. 2021:108 Counteracting Risky Lending and Over-Indebtedness (Motverka riskfylld kreditgivning och överskuldsättning), appointing a special investigator to examine the market for consumer credit and to assess whether measures to counteract risky lending and over-indebtedness are necessary, as well as to make proposals accordingly to the assessment. The report is due by May 3, 2023.

Australia

On March 1, 2021, the Buy Now, Pay Later Code of Practice entered into force in Australia, setting voluntary standards for the sector.

In November 2022, the Australian government announced a consultation on a regulatory framework applicable to BNPL products under the National Consumer Credit Protection Act 2009.

The consultation paper focuses on three options for regulatory action in the BNPL sector:

• Strengthening the BNPL Industry Code and establishing a bespoke affordability test.
• Regulating BNPL in a restricted manner under the Credit Act framework, which will involve tackling issues related to the Australian Credit Licence (ACL) licensing regime.
• Regulating BNPL under the Credit Act, with fully applicable Responsible Lending Obligations (RLOs) and ACL obligations.

The consultation closed on December 23, 2022.

In December 2022, the Australian Treasury and the Data Standards Body (DSB) announced a consultation to gather feedback on the rules to extend the implementation of the Consumer Data Right (CDR) to the non‑bank lending sector.

The consultation paper, among other things, proposes a list of products that will fall within the scope of the CDR, including traditional lending products and BNPL. The consultation closed on January 31, 2023. To date, no updates on the outcomes of the consultation have been released.

An analysis on Australia’s BNPL landscape can be found here.

Canada

On November 18, 2021, the Canadian government released a Pilot Study: Buy Now, Pay Later Services in Canada from the Financial Consumer Agency of Canada (FCAC), which stated that, among other actions, it will monitor the market to understand how vulnerable consumers use it and will examine the regulatory framework applicable to such products. Among the risks mentioned are over-borrowing and over-indebtedness. The Canadian government has not since released updates on regulation applicable to BNPL.

Hong Kong

In September 2022, the Hong Kong Monetary Authority published a circular on enhancing consumer protection in respect of BNPL products.

The circular:

• Highlights concerns regarding the consumers’ ability to repay the credit.
• States that BNPL products entail lending by authorised institutions (AIs) to customers and therefore AIs must follow all consumer protection measures set out in the Code of Banking Practice (CoBP) and the Treat Customers Fairly Charter.

• Requires AIs to comply with other applicable legal and regulatory requirements, including the Personal Data Ordinance and any relevant codes of practice issued by the Privacy Commissioner for Personal Data.
• Requires AIs to assess the creditworthiness of applicants.

• Requires AIs to include the educational message of “To borrow or not to borrow? Borrow only if you can repay!” on their products, and to ensure that advertising materials are not misleading and clearly set out relevant fees and charges.

• Sets out that the measures prescribed in the circular must be implemented no later than the end of 2022.

New Zealand

In December 2022, the New Zealand Ministry of Business, Innovation and Employment (MBIE) launched a consultation on an exposure draft of the Credit Contracts and Consumer Finance (BNPL) Amendment Regulations 2022. The proposed regulations aim to give effect to the NZ government’s decision to apply the Credit Contracts and Consumer Finance Act 2003 (CCCFA) to BNPL credit and to protect consumers from financial harm, while enabling access to low-cost credit. The consultation closed on February 24, 2023.

The final regulations are expected to be made later in 2023.

Russia

On November 1, 2021, the Central Bank of Russia (CBR) issued an information letter* that refers to cases in which professional lenders (intended as a person carrying out professional activities in the provision of consumer loans in accordance with Clause 5, Part 1 of Article 3 and Article 4 of the Federal Law No. 353-FZ, dated 21 December 2013, “On Consumer Loans”)* provided payment services that allow consumers to make a purchase by paying in instalments without concluding consumer credit contracts. The bank noted that this practice stripped consumers of a number of significant rights and guarantees provided by Federal Law No. 353-FZ, such as right of information, limiting the cost of borrowed funds and the amount of penalties and limiting the possibility of assignment of rights requirements. Therefore, the bank recommended that professional lenders refrain from such practices until changes in regulations are implemented.

In November 2022, the CBR announced* its initiative to develop regulations regarding payments in instalments. The bank stated that based on its study on the international experience with BNPL, it is considering bringing together consumer credit legislation and requirements applicable to instalment service providers.

* Please note that access to Russian websites may be limited at certain times.

Singapore

In October 2022, the Singapore Fintech Association (SFA) announced the publication of its BNPL Code of Conduct. The code sets out guidance for BNPL service providers in Singapore to protect consumers and ensure that BNPL offerings will continue to benefit the market.

The SFA states that the code aims to delineate best practices, including:

• Creditworthiness safeguards.
• Fair, transparent fees and clear disclosures.
• Ethical marketing practices.
• Accommodation for voluntary exceptions.
• Financial hardship assistance.

To promote the adoption, BNPL providers will be required to undergo an audit and accreditation process, which will allow them to display an accredited trustmark to show their compliance with the BNPL code.

US

In December 2021, the Consumer Financial Protection Bureau (CFPB) launched an inquiry into the lending practices of five leading BNPL providers — Afterpay, Affirm, Klarna, PayPal and Zip — because of its concerns on consumers’ growing debt and providers’ data collection practices.

In January 2022, the CFPB launched a public consultation on BNPL products, followed by the release of a report detailing the rapid growth of BNPL lending in September 2022. The report revealed rapid growth of the BNPL industry in the last few years and deficiencies in consumer protection: “[f]rom 2019 to 2021, the number of BNPL loans originated in the U.S. by the five lenders surveyed grew by 970 percent, from 16.8 to 180 million, while the dollar volume of those originations (commonly referred to as Gross Merchandise Volume, or GMV) grew by 1,092 percent, from $2 billion to $24.2 billion”. The consumer protection issues, where identified, included lack of clear information, challenges in accessing disputes resolution, collection of data and encouraging over-extension of the loans. The CFPB plans to ensure that borrowers using BNPL products are guaranteed the same level of protection as credit card users.

Next steps

The UK government will consider any necessary changes to the draft legislation on the basis of evaluation of the feedback received to this consultation. It also intends to publish a consultation response to set out the fundamentals for a regulation. Following that, the government is expected to submit legislation proposals to the parliament in 2023.

The government invites responses to the consultation by 11.59pm on April 11, 2023, sending these by email to BuyNowPayLater@hmtreasury.gov.uk.

Conclusion

The BNPL market has been rapidly growing in the last few years. However, on the basis of data found from research, jurisdictions across the globe have expressed their concerns regarding consumer protection, especially the risk of over-indebtedness due to the lack of checks of consumers’ creditworthiness. To address these issues, various initiatives have been undertaken by authorities: for example, the EU is in the process of adopting a directive regulating BNPL, among other products, and the Central Bank of Russia is expected to issue regulation on this matter. Similarly, the UK government is seeking feedback to inform the future BNPL regulatory framework in the country. Some of these jurisdictions, such as Singapore and Australia, have issued codes, with Australia taking further steps by considering the adoption of regulations. Ireland has introduced both legislative provisions requiring BNPL providers to hold a licence and updated the Consumer Protection Code 2012. The UK proposal has opted to regulate the sector via legislative provision and suggests considering BNPL as a “credit agreement” and empowering the FCA to regulate the sector, as well as providing a financial promotion and advertising regime, among other things. From the amount of reviews and considerations having taken place in recent years, it is safe to state that this sector will become increasingly regulated in the future across the world.