Financial transaction

UK Treasury Launches ‘Buy Now, Pay Later’ Financing Regulation Consultation | Skadden, Arps, Slate, Meagher & Flom LLP

[co-author: Harry Smouha]

On October 21, 2021, the UK Treasury issued a consultation document defining policy options for the regulation of “buy now, pay later” (BNPL) credit agreements. The consultation follows the publication of the Woolard Reviews in February 2021, which made several recommendations aimed at addressing the regulatory gaps in the UK consumer credit market, especially in light of recent innovations. (See our customer alert of February 9, 2021, “British Woolard Review proposes regulations for BNPL credit agreements”.)

The number of UK consumers using BNPL has increased in recent years. The value of BNPL transactions in the UK more than tripled in 2020, to over £ 2.7 billion, and is expected to grow rapidly over the next few years1.

Companies that offer BNPL products to merchants are currently exempt from regulation under the UK consumer credit scheme. This allows lenders to offer interest-free credit on an unregulated basis if the agreement: (i) is a borrower-lender-supplier agreement (i.e. an agreement between the borrower and the lender to finance a transaction with a supplier), (ii) is a credit of a fixed sum, (iii) the number of payments does not exceed 12, and (iv) payments must be made within 12 months of the start of the ‘OK. This exemption is widely invoked in particular markets such as higher value consumer goods (furniture, appliances, etc.) and bill financing, which predate BNPL’s expansion.

The Treasury consultation concludes that BNPL providers should no longer benefit from the exemption. However, while the Woolard review concluded that the BNPL agreements pose a greater risk to consumer finances than other agreements falling under the exemption, the Treasury admits that there was no evidence of harm. generalized to consumers. In fact, BNPL products could potentially improve consumer choice, flexibility and competition. As a result, the Treasury is proposing limited regulation rather than an outright removal of the exemption.

The amount of pre-contractual information provided to consumers is a key issue in the BNPL rules proposed by the Treasury. The consultation concludes that the Consumer Credit Act (CCA) set of rules governing disclosure to borrowers is not appropriate, as consumers enter into BNPL deals online much more frequently than traditional credit products , often of higher value. The Treasury proposes that the UK’s Financial Conduct Authority (FCA) set more limited disclosure standards for BNPL products than those that apply to other consumer loans under the CCA.

The Treasury consultation paper also addresses the credit ratings of BNPL’s purchases, an issue highlighted by consumer watchdogs. Since BNPL products are currently not regulated by the FCA, vendors are under no obligation to conduct new customer credit reviews or individual agreements. The Treasury anticipates that proportionate regulation of BNPL would include the application of current FCA solvency rules to BNPL agreements, noting that concerns have been raised about unclear or inconsistent use of credit reference agencies by credit reference agencies. sellers offering BNPL options.

Another notable point is the Treasury’s treatment of ‘small deals’ in the CCA, which exempts credit contracts under £ 50 from CCA consumer protections. The average BNPL transaction value is low, often between £ 65 and £ 75 with many falling below the £ 50 threshold. A large portion of BNPL’s transactions will therefore be classified as “small agreements” for CCA purposes. The Treasury suggests that the scope of the CCA’s ‘small deals’ exemption be narrowed down so that BNPL transactions under £ 50 are not exempt, but it does not explain how the non-BNPL deals that currently meet the requirements. conditions for this exemption will be affected.

The Treasury consultation suggests that the proposed legislation will reflect the benefits of innovation and choice for consumers represented by BNPL options, but for the first time bring many BNPL providers to consumer credit regulation.

The consultation period will end on January 6, 2022.

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1 The Woolard Review, paragraph 4.19.

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