Government publishes response to BNPL regulation consultation

HM Treasury (HMT) published its response to the Regulation of Buy-Now Pay-Later consultation on 20 June 2022, the Finance & Leasing Association reported. The consultation had concluded on 6 January 2022¹. The government first announced its intention to bring unregulated interest-free buy now pay later products into regulation on 2 February 2021, following the Woolard Review for the Financial Conduct Authority, and published its initial consultation on 21 October 2021¹.

The response sets out the intended scope of regulation. It should capture BNPL and currently exempt agreements, referred to as short-term interest-free credit (STIFC), when they are provided by third-party lenders¹. The government is "minded to extend" this scope to STIFC provided directly by merchants where it is offered online or at a distance, but says further engagement is needed to understand the scale of that market¹. Exemptions will be allowed for specific agreements where there is limited risk of consumer detriment and where regulation would otherwise adversely affect day-to-day business activities¹.

On consumer protections, the response says section 75 should not be disapplied for agreements brought within the scope of regulation, and that current Consumer Credit Act requirements on post-contractual information, particularly the timing of when it must be sent, may need to be tailored for BNPL and STIFC agreements given their sometimes very short-term nature¹. It also states that clear, consistent and timely credit reporting across the three main credit reference agencies will be an important part of the responsible provision of BNPL products, and that proportionate regulation should include the ability for consumers to access the Financial Ombudsman Service for issues concerning the conduct of lenders¹.

HMT is seeking further information on merchant-provided STIFC, set out at Chapter 2 of the response, covering the potential number of merchants providing STIFC themselves, whether in person or online or at a distance, the sectors they operate in, and how merchants administer and manage that provision¹. Responses are requested by Monday 1 August 2022¹. The government's hypothesis is that STIFC provided directly by a merchant in person in store does not carry the same level of risk as agreements provided online or at a distance, because of the greater friction present during in-person transactions¹.

Why it matters for households

BNPL agreements are currently unregulated, so consumers using them do not have the same protections attached to other credit products. Under the intended scope, agreements with third-party lenders would be brought into regulation, and section 75 rights would not be removed for those agreements¹. The response also points to access to the Financial Ombudsman Service for conduct issues and to credit reporting across the three main credit reference agencies¹. The timing of post-contractual information may be adjusted for these short-term products¹. None of this applies yet: the framework depends on secondary legislation the government aims to lay in mid-2023¹.

The scope question matters for where people buy. STIFC offered by a third-party lender would be captured, and the government is minded to extend that to merchant-provided STIFC online or at a distance, while suggesting in-store merchant STIFC carries less risk¹. A final decision on merchant-provided STIFC has not been made, and the government has said it remains uncertain about the population of merchants, particularly smaller businesses, that regulation might catch¹.

What happens next

Further information on merchant-provided STIFC is requested by 1 August 2022¹. A second consultation on draft regulations and a draft regulatory impact assessment is expected by the end of 2022, with the government aiming to lay secondary legislation in mid-2023; the Financial Conduct Authority will consult in parallel on its approach to rule changes¹. The response should also be read alongside the government's announcement on 16 June 2022 of its intention to reform the Consumer Credit Act, with a consultation expected by the end of 2022, and the FCA's Credit Information Market Study, due to be published in 2022¹.