Government aims to lay secondary legislation on BNPL regulation in mid-2023

HM Treasury published its response to the Regulation of Buy-Now Pay-Later consultation on 20 June 2022, the Finance & Leasing Association reported¹. The consultation had concluded on 6 January 2022¹. The government intends to publish and consult on draft legislation at the end of 2022, with the aim of laying secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime¹.

The scope of regulation should capture buy now pay later as well as 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 also capture STIFC provided directly by merchants where it is offered online or at a distance, but says further stakeholder engagement is necessary to understand the scale of the merchant-offered STIFC market¹. Exemptions will be allowed for specific agreements where there is limited risk of potential consumer detriment and where regulation would otherwise adversely impact day-to-day business activities¹.

On regulatory controls, the government's approach will tailor the application of the Consumer Credit Act to these products and to the elements of lending practice most linked to potential consumer detriment¹. Section 75 should not be disapplied for agreements brought within the scope of regulation, though the current CCA 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. The government's view is 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 products¹. Proportionate regulation should include the ability for consumers to access the Financial Ombudsman Service for issues concerning the conduct of lenders¹.

The FLA, which represents lenders, said it had responded to the initial consultation advocating that BNPL come under the same comprehensive regulatory framework as other credit products, that merchants offering BNPL products are also subject to proportionate regulation to prevent gaps in consumer protection, and that reform of the Consumer Credit Act is needed to avoid a fragmented approach¹. The government announced its intention to reform the CCA on 16 June 2022, with a consultation expected by the end of 2022¹.

Why it matters for households

The products affected are interest-free deferred payment agreements that are currently unregulated, along with similar short-term interest-free credit¹. The government first announced its intention to bring unregulated interest-free BNPL products into regulation on 2 February 2021, following the Woolard Review's identification of potential consumer detriment¹. The initial consultation was published on 21 October 2021¹.

The changes would not take effect until secondary legislation is laid, which the government aims to do in mid-2023¹. Until then, the regime covering these agreements is unchanged. The FCA will consult on its approach to rules changes in parallel with the legislation¹. The government has also said it remains uncertain about the potential population of merchants, particularly smaller businesses, who may be caught by regulation, and asked for further information by Monday 1 August 2022¹. It has not been reported what the outcome of that request was.

What happens next

A second consultation on draft regulations and a draft regulatory impact assessment was expected by the end of 2022¹. The government then aims to lay secondary legislation in mid-2023¹. The FLA noted that the implications of the CCA reform consultation, the FCA's implementation of the Consumer Duty and its Credit Information Market Study would need to be considered for the second phase of the BNPL consultation¹.