The Retailer Winter Edition 2022
THE RE TA I L ER
BUY-NOW PAY-LATER REGULATION: WHAT NEXT?
Sophie Lessar Partner DLA Piper
T he plans for regulating Buy-Now Pay-Later are becoming clearer. Retailers and lend ing business will need to plan for the new regulation, its business and customer impacts and how to comply. The UK Government has published its consultation on the Regulation of Buy-Now-Pay-Later (“BNPL”) products. The Consultation is a response to the growth in use of BNPL to purchase lower-value consumer goods. As a result, BNPL lenders will need to be authorised by the Financial Conduct Authority (“FCA”) and comply with conduct rules about how products look and work. Rules around lending decisions and customer arrears are also under consideration. The Consultation says it is intended to strike a balance between ensuring consumers have appropriate protection when using BNPL and access to useful financial products. The prospect of further regulation for BNPLwill have consequences for merchants, BNPL finance providers, and the consumer. 1. Consumer Detriment Focus The Consultation was launched in response to the Woolard Review, which the FCA published on 02 February 2021. The Woolard Review focussed on concerns about the potential for greater risk to consumers when using BNPL agreements compared to other financial agreements, particularly in the context of it being currently unregulated in the UK. The Consultation recognises that to date, evidence of wide-scale of consumer detriment has not materialised. The Consultation attempts to draw the scope of regulation to those aspects of the BNPL model which the Government views as being most likely to harm consumers. As well as BNPL, other short-term interest-free credit (“SIC”) financial arrangements, currently fall under the same exemption from regulation as BNPL. SICs can be made by retailers or third party lenders and include interest-free instalment loans that are repayable in under a year. These are often used for white goods, electronics, furniture and dental procedures, as well as monthly payments for club memberships and season tickets. The Consultation states that regulatory controls should be imposed on BNPL agreements, but that it is difficult to define the scope of reg ulations given that SICs share some, but not all, of the potential risks for consumers as BNPL. There is a question about whether or to what extent some or all SICs should be regulated in the same way. 2. Similar interest-free products: Drawing regulatory lines
Some proposed options to scope the new regulation include: • restricting the extension of regulation to short term interest-free credit agreements where there is a third-party lender involved in the transaction, and keeping arrangements directly between a retailer and a consumer exempt from regulation; or • defining a BNPL agreement as one where there is a pre-exist ing, overarching relationship between the lender and consumer, under which the lender agrees to finance one or more transac tions on a fixed sum credit basis.
BNPL v Short-term Interest-free Credit : Proposed Distinction
Short-term Interest-free Credit Credit provider: (a) independent third-party lender; and (b) mer chants themselves extending credit to offer payment by instal ments e.g. white goods, season ticket. Payment of instalments: payment is usually split into 12 instalments over 12 months, reflecting the higher value of the goods/services purchased. Nature: third-party lenders tend to have bespoke, long-term business relationships with relatively few merchants. Each credit tends to be a discrete transaction. Used more frequently in-store rather than online. Regulation: the third-party lenders tend to be authorised by the FCA for other regulated activities.
Credit provider: independent third-party lender.
Payment of instalments: payment is split into several equal amounts taken at regular intervals and deferred payment may be avail able, reflecting the lower-value of the goods/services purchased. Nature: the consumer can use their account with the third-party pro vider to finance purchases from a wide range of other merchants. The consumer chooses to enter into an arrangement at the point of sale. Regulation: the third-party lend ers tend not to be authorised by the FCA.
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