The Retailer Spring Edition 2021

THE RE TA I L ER

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BUY-NOW-PAY LATER AND CONSUMER CREDIT REGULATION IS CHANGING

Sophie Lessar Partner DLA Piper

B uy-now-pay-later is all lending business needs to plan for wider rule updates. becoming regulated which will affect retailers and The FCA, which regulates UK financial services, has announced plans to overhaul UK consumer credit regulation. Shifts to digital channels underpin these changes. Buy-now-pay-later (BNPL), will be regulated, where it largely isn’t at the moment, impacting retailers. Those already offering credit must also prepare for other changes the FCA is planning, whether the credit is an in-house or third party product. The regulator emphasises the growth of digital lending and how to ensure good customer out - comes. It is also focussing on how customers are treated when they get behind with their repayments. Change and innovation under review The FCAhas published a report on the findings of its review on change and innovation in the unsecured credit market. This focuses on: • rapid growth in BNPL as an unregulated credit channel; • consumer protection and potential harm, particularly in digital channels; • challenges resulting from the COVID- 19 pandemic, especially affordability of credit and lending decisions. Regulatory change is planned to address these concerns and reassure customers. The FCA intends to allow regulation to adapt more to changing customer habits, where some rules are challenging to implement through digital platforms.

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Buy-now-pay-later: Authorisation and

Customer forbearance and digitisation will be at the heart of changes. Benchmark current pro - cesses across the credit product lifecycle”.

compliance implications BNPL is largely unregulated in the UK. This means that many BNPL providers haven’t needed to be FCA authorised or to follow consumer credit conduct rules. In these cases, retail partners have not needed authorisation or to follow these rules to offer BNPL. This is going to change for products with all of these features: • credit is repayable within 12 months; • there’s a maximum of 12 repayments; and • no interest or other charges apply if customers repay on time. BNPL providers will need to become FCA authorised if they aren’t already. This is a lengthy process and regulation will govern customer interactions and business processes. It is likely that retailers offering BNPL– although it is from a third party – will also need to be licensed. “Introducing” regulated credit requires an FCA authorisation. Retailers would have to comply with conduct rules as “credit brokers”. Alternatively, it maybe possible to operate under the umbrella of a BNPL’s own authorisation as an “appointed representative”. Risk frameworks would need implementing to do this.

Buy-now-pay-later: planning

Identifying the implications of these changes and planning for transition is important. Steps include: • checking the impact of these proposals e.g. will a BNPL partner need to become authorised, and what this means for your own business; • identifying authorisation and conduct implications, and how these affect the customer journey and processes behind- the-scenes, timings for getting licensed and making systems changes; • monitoring the regulatory proposals as more detail is published. The FCA is planning a shift in its regulatory stance for credit activity, including business it already regulates. Lenders operating digitally have found aspects of the conduct rules challenging as they do not always suit digital channels and communica - tion. This was raised in feedback to the FCA and has informed its approach, although it is also wary of digital exclusion. Monitor FCA plans to shift to “outcomes based regulation” in terms of changes to regulation and internal compliance processes. All regulated lending: lifecycle changes for business

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BNPL: Should we get authorised? Can a part - ner provide a regulatory umbrella? Would we need to comply with conduct rules?”.