On 2 February 2021, former interim chief executive of the Financial Conduct Authority (FCA), Christopher Woolard CBE, published a review on the risks of the currently unregulated buy now pay later (BNPL) products (the Woolard Review). The review, which can be found here, goes into detail of the increased risks associated with the interest free credit products and provides the FCA with multiple recommendations on regulatory changes to manage these risks.

Amongst the detailed report, one of the main recommendations is to urgently amend the current regulatory framework and include BNPL products within the regulatory scope of FCA regulation. The UK government (Government) has already officially published its agreement with the Woolard Review, which can be seen here, confirming that BNPL products should be included within the Financial Services and Markets Act 2000 (FSMA) regime as a matter of urgency. The relevant changes are expected to be added to the currently debated Financial Services Bill in order to implement this change in the legislation.

Why regulate?

According to the Woolard Review, the use of BNPL products has more than tripled within the past year, exacerbated by coronavirus and consumers' increased impulse buying. With the increased use has come increased risk. The review points out that many consumers, for example, do not recognise that a BNPL payment method is a form of credit and make the decision to use a BNPL payment method without being fully informed on the possible consequences of late repayment. The Woolard Review highlights its concern that, due to the lack of regulatory oversight currently afforded to BNPL products and BNPL providers, many consumers over the coronavirus period have entered into these short-term loans which they will then be unable to repay.

Currently, many firms providing the interest free delayed payment methods benefit from the exemption found under Article 60F(2) of the Financial Services and Markets Act (Regulated Activities) Order 2001 (RAO), where, among other factors, the loan qualifies for the exemption as long as the number of payments of the loan is less than twelve, the repayments are required to be made in twelve months or less and it is provided without interest. Such firms providing BNPL products currently do not have to be FCA authorised and are not required to comply with the regulatory requirements as set out in the FCA Handbook and more specifically the Consumer Credit sourcebook in the FCA Handbook (CONC).

Consequences for providers of BNPL products

Once the Government implements the Financial Services Bill and makes the necessary changes to FSMA in order to include BNPL products under the regime, this will mean additional requirements and obligations for BNPL providers to adhere to. It is expected that BNPL providers will need to become authorised by the FCA to continue to provide such products although this is likely to be confirmed in the Financial Services Bill.

In addition to becoming authorised, BNPL providers will need to comply with ongoing regulatory requirements which include:

  • Affordability checks

    Under CONC 5, regulated firms must undertake 'responsible lending' which means carrying out a reasonable assessment of credit worthiness before entering into a credit agreement. This assessment includes looking at a consumer's ability to repay the funds without needing to take out additional loans. Firms carrying out such checks must have its procedures set out in writing, including specifying the range of information which it will take into consideration.

    This will be more effective than the current 'soft' credit checks carried out by BNPL providers, which the Woolard Review confirm lack the level of diligence needed to fully understand a consumer's financial position.

  • Standard on financial promotions

    CONC 3 stipulates that all financial promotions 'must be fair, clear and not misleading'. This also means taking care not to promote credit to a customer where the firm has reason to believe that this form of credit would be unsuitable due to a customer's financial circumstances.

    Some of the BNPL market's competitors have already been reprimanded by the likes of the Advertising Standards Agency (ASA) for irresponsible advertising, and the Woolard Review further highlights multiple examples of behavioural bias used in such BNPL promotions. Once BNPL products fall within the FCA regime, this will set a higher standard for financial promotions to meet and should bring further clarity to consumers using these products.

  • Arrears management

    CONC 7 further provides that a firm must have 'clear, effective and appropriate policies and procedures' in place for dealing with customers whose accounts fall into arrears. As set out in the Woolard Review, BNPL providers have different approaches to late payment, ranging from charging a fixed fee after certain number of days of late repayment to passing debts on to debt collection agencies. Further, these repayment fees 'make up a significant portion of the firm's overall revenue'. CONC requires firms providing such form of credit to treat such consumers with forbearance and should suspend or waive further charges where a customer can provide evidence of being in financial difficulty. In the current economic climate, such a right is vital for consumers.
Effect on partner retailers

Should BNPL providers have to become authorised firms, this would also require current retailers using such BNPL products to either (i) become FCA authorised for credit broking; or (ii) register under the FCA appointed representative regime (AR Regime) by becoming an appointed representative of the BNPL provider. Such retailers under the AR Regime would still have to comply with some of the standard FCA rules, but it will be the responsibility of the BNPL provider to ensure that the retailer's acts or omissions as an appointed representative do not jeopardise the BNPL provider's compliance under CONC.

Other recommendations

The Woolard Review also makes some of the below recommendations to the unsecure credit market more generally:

  • Increased focus on debt advice should be available to allow all consumers to make more informed decisions.

  • The FCA should take a more holistic approach of the regulations, considering the outcomes and how this correlates with how consumers actually use credit. The Woolard Review therefore suggests that changes be made to the Consumer Credit Act 1974 (CCA) and the FCA Handbook.

  • Alternative forms of lending should be made available to individuals, which are designed to help improve an individual's credit file and build financial resilience. Further steps should also be taken to increase consumer awareness of alternative lending products.

  • Increased prescription of forbearance rules, such as setting out a minimum standard for all firms to include as part of their forbearance process.
Next steps

The FCA is considering the suggestions made in the Woolard Review and will provide its response to the recommendations in its April 2021 Business Plan.

Although it is not yet known what balance will be struck and what restrictions will be placed on BNPL providers, the Government has already officially confirmed its intentions of regulating BNPL providers and for this to be implemented urgently. Firms should therefore begin preparing their procedures now to be in the position to comply with the necessary affordability checks and other requirements when the time comes.

Should you have any questions about the above, please do not hesitate to contact one of the members of the Bird & Bird global payments team.

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