It's here. After what feels like months of speculation, the government has launched its consultation on the unregulated 'Buy Now Pay Later' (BNPL) sector. We finally have an idea of the direction of travel for the regulation of BNPL.

But don't get too excited. Being a consultation, it is just proposals at the moment and the government has seemingly not got all the answers at this stage (more on this later).

So, what could this consultation mean for lenders and retailers offering BNPL? Well, dare I say it, it's better news than perhaps initially anticipated.  

The good news

  • No requirement for retailers to be subject to Financial Conduct Authority (FCA) regulation as credit brokers - The FCA's comment in the Woollard review that it was right for retailers introducing BNPL finance to be regulated as credit brokers was frankly a headache for BNPL providers. The whole premise of BNPL requires a large network of retailers with whom a customer can use BNPL finance. Choice and convenience is key. Requiring each of these merchants to be authorised or an appointed representative would likely have reduced the number of merchants offering BNPL. The government has recognised this and indicated that it wants to avoid extra red tape preventing merchants from offering customers payment solutions that a customer views as convenient. This is a big U-turn from the Woollard review and if this proposal is implemented this will be very good news for BNPL providers. 
  • Limited pre-contractual information - The proposal is that BNPL providers will be required to provide the pre-contractual explanations as set out in CONC 4 and that the Standard Consumer Credit Information will not be required. The rationale for this is that the online nature of BNPL journeys means that "there is a particularly high risk that the customer will not engage with long and detailed information disclosures". This is great news for BNPL providers and customers and hopefully the first step in the government modernising consumer credit to move away from inflexible prescribed form documents in favour of engaging with customers to help them really understand the credit agreement they are signing. It is time to move into the 21st century to help customers make informed decisions about their payment options.
  • Credit agreement documentation better suiting the nature of BNPL - Another big win; a proposal of bespoke legislation detailing the form and content of BNPL agreements. Of course, form and content requirements will be more than BNPL providers are currently used to but any flexibility from the current consumer credit requirements is to be welcomed.  

The bad news

  • Unenforceability sanctions if the BNPL is not properly signed - The government talks about proportionality throughout the consultation, yet it intends to apply unenforceability sanctions to BNPL agreements. Draconian unenforceability sanctions set consumer credit out from other areas regulated by the FCA (eg mortgages) and it is difficult to see how this is proportionate for an interest free, low value product when it is not applicable to mortgages. Indeed the government notes that this will lead to more friction in the BNPL transaction which could be useful for customers in making an informed decision. BNPL providers designing mobile or tablet friendly customer journeys will not welcome increased friction given speed and ease of use is key. This also increases the risk for BNPL providers substantially given the high volume, low value nature of BNPL. A non-compliant customer journey will lead to a huge number of unenforceable agreements. There will need to be a renewed focus on weighing up the risks of an agile customer journey vs strict compliance with the law.
  • Application of section 75 - Section 75 allows a customer under a regulated credit agreement to claim against a lender as well as a supplier for the supplier's breach of contract or misrepresentation, and currently only applies for goods or services with a value between £100 and £30,000. The government considers that the protection of section 75 could apply to BNPL. This is unsurprising given the fact that BNPL finance is a direct competitor at point of sale to credit cards and section 75 is a key protection offered by credit card providers. However, where BNPL providers have extensive merchant networks with limited diligence of retailers, section 75 liability potentially adds a significant cost to BNPL finance and may make providers reluctant to extend to some SME retailers. It will also be interesting to see whether the government will maintain the £100 minimum threshold given that many BNPL transactions will not reach this value.  
  • Affordability - Perhaps the least surprising news is that the government proposes that regulation of BNPL should include rules on assessing creditworthiness and affordability. In addition, the government states that it is going to work with the credit reference agencies to find a solution to how BNPL should be reported to credit files.
  • Arrears, default and forbearance - The government proposes that some of the FCA's requirements in CONC around treatment of customers in financial difficulties should apply to BNPL. Interestingly, the government specifically discusses the waiving of default charges; BNPL products often feature default charges for missing payments which are one of the more controversial elements of a BNPL offering. Whilst default charges are typically not a significant part of the profit made by a BNPL provider, waiving such charges will further reduce the margin on BNPL and potentially make it less commercially appealing to lenders.
  • Post-contractual information on arrears - The government is consulting on the proportionality of applying arrears and default notice requirements to BNPL noting that these notices provide a warning to a customer to take action. Given that some of these notices must be sent by post, they do not sit particularly well with a frictionless BNPL journey and will inevitably have a consequence on the cost of offering BNPL. It must also surely be time for the government to use BNPL reform as a catalyst to review these notices more widely and consider how they can be modernised to make them more user friendly. 
  • FOS redress - Finally, the government's view is that BNPL customers should be given access to the Financial Ombudsman Service. This is not a surprising conclusion, but again will increase the costs of offering BNPL finance. The volume of BNPL transactions coupled with the increasing FOS case fees will squeeze margins of BNPL further. It will be interesting to see whether a proportionate FOS regime will be introduced for BNPL.  

And the (possibly) ugly?

How do you tell the difference between a BNPL agreement and a short-term interest-free agreement? Answers on a postcard for this one because the government isn't really sure yet either. This distinction is important because BNPL will become regulated whereas a short-term interest-free agreement will remain outside the FCA's perimeter. The two options mooted by the government are: 

1. extending regulation to interest-free credit agreements where there is a third party lender but maintaining the existing exemption for agreements where retailers offer deferred payment terms on an interest-free basis; or

2. defining BNPL agreements as those with a pre-existing relationship between the BNPL lender and the customer under which the BNPL lender finances transactions but repayments are made towards specific agreements. 

Each of these options have drawbacks. The first will extend regulation to a wide group of agreements where there is limited customer harm. The second leaves itself open to restructuring of BNPL so that propositions fall outside the definition. 

Clever, nuanced drafting is going to be required to ensure that there is a clear distinction between BNPL agreements which will be regulated, and short-term, interest-free credit agreements which will continue to be exempt. This distinction must be robust to avoid the risk of BNPL lenders restructuring their businesses to remain exempt and also to maintain the use of the exemption for premium finance, season ticket finance etc. This is going to be quite the challenge for the draftsman. 

Lots of food for thought and much to play for for BNPL lenders. The consultation remains open until 6 January 2022 and it will be interesting to see whether the government's final proposals are less robust than the FCA initially indicated.