Buy Now, Pay Later regulation – the wait is (nearly) over

It is worth noting as a preliminary point that, having taken a significant time to get to this position, this is a short consultation – it closes in six weeks on 29 November 2024 so there isn’t much time to respond to it.

The UK Government promised that, when regulation was introduced, it would be proportionate so consumers could continue to access this popular form of interest free credit but within the protection of the regulatory perimeter. So, does the draft legislation deliver on that promise of proportionality? From a quick read it appears that, for the most part, it does

Top ten headline issues

In terms of the top ten headline issues:

1. We get a new category of regulated credit agreement – the “regulated deferred payment credit agreement”.  As anticipated, this new category does not include loans made by merchants (rather than third party lenders) which remain exempt.  Anti-avoidance provisions are in place to prevent third party lenders becoming the merchant by transfer of title of the goods. It also excludes agreements to finance insurance premiums, certain employee loans and loans by registered social landlords to finance the provision of goods or services.
2. Regulated deferred payment credit agreements are specifically carved out from the definition of small agreements, so credit not exceeding GBP50 will fall within the new regime. It remains to be seen whether this leads to a contraction in the availability of low value interest free loans given the cost of operating as an authorised firm, even under a lighter touch regime.
3. There is good news in that the main prescriptive Consumer Credit Act 1974 (CCA) requirements for pre-contractual disclosure, form, content and execution of agreements and post-contractual notices will not apply.  This means that, not only will firms not have to comply with the requirements, but the (often disproportionate) sanctions attached to breaches of those requirements are also disapplied. The disapplication of sanctions was raised as a concern during the earlier consultation, but the conclusion is that any potential gap can be filled by Financial Conduct Authority (FCA) oversight, the CONC rules and guidance, the application of the Consumer Duty and the ability of the Financial Ombudsman Service to determine complaints.
4. Most of the nuts and bolts for the conduct of business regime for these agreements will be for the FCA to design and we can expect consultations on those later on. These will include rules and guidance around disclosure, creditworthiness assessments and regulatory reporting. It is interesting to note that it appears generally accepted that imposing the prescriptive and cumbersome requirements of the current CCA regime would not achieve the best possible consumer outcomes. It is to be hoped that this is borne in mind in relation to the FCA’s wider CCA reform work currently underway.
5. There are no current plans for firms who already offer regulated credit products to be able to “opt in” to the existing CCA requirements where that might achieve operational simplicity and cost savings – it may be that such firms will have to comply with two distinct sets of requirements. It is left to the FCA to determine whether use of CCA documents is consistent with its new rules in due course, but firms should consider whether, in reality, this would be an attractive option if, for example, it means a lender opts into everything, including the sanctions for breaches of the requirements.
6. Financial promotions will need to be approved by an authorised person and a change will be made to the Financial Promotion Order to remove the current exemption which allows a merchant to communicate a financial promotion which is made for the purposes of introducing a consumer to an FCA authorised lender.
7. There will be Temporary Permissions Regime (TPR) to enable unauthorised firms to continue to lend until their applications for full authorisation are processed. To accommodate that there will be two stages in the introduction of the new FCA rules. The first stage will enable the FCA to set up the TPR and consult on and make new rules relating to regulated deferred payment credit agreements, while the second stage will introduce the substantive legal changes.
8. Lenders who decide to exit the market can apply for a retained temporary permission to enable them to service existing agreements. This temporary permission will last for two years. Given that the agreements have a maximum term of 12 months, the view is that two years will provide ample time to deal with agreements that run past term.
9. It should be noted that firms in the TPR will not be able to approve bespoke financial promotions developed by merchants so, while a firm is in the TPR, we anticipate that the common practice will be for the lender to issue financial promotions for use by their merchants.
10. Section 75 of the CCA which provides that a lender is jointly and severally liable for breaches of contract or misrepresentation by suppliers of goods or services financed by a debtor-creditor-supplier agreement will apply. It will be interesting to see whether, over time, this leads to more rigorous due diligence by lenders on the merchants they sign up, especially if there is a material uptick in section 75 claims.

What next?

As mentioned, this is a short consultation – responses must be in no later than 29 November 2024. While regulation is now inevitable, it will still be over a year before the regime takes full effect. Following this consultation, the Government will publish its final policy position and then parliamentary time will be required to bring forward the new legislation. It will then be the task of the FCA to deal with the implementation of the TPR and the new rules. Firms will be subject to full regulation 12 months after the legislation is made.