A fine balancing act: HM Treasury consult to regulate Buy Now, Pay Later.

Following the Woolard Review at the start of the year calling for the unregulated Buy Now Pay Later (BNPL) to be regulated by the FCA, HM Treasury accepted the findings of this review and began work to build the legislative framework required to bring BNPL lending into the regulatory perimeter. Currently this type of lending is exempt from regulation under section A60F of the Regulated Activities Order. HM Treasury issued their consultation last week, which sets out policy options to achieve a proportionate approach to regulation of BNPL.

Consultation aims

The consultation considers the potential scope of regulation to target, as closely as possible, products where consumer detriment could arise. It also seeks views on a range of regulatory controls that could be put in place for BNPL, to ensure that they are focused on those elements of lending practice that are most closely linked to potential consumer detriment in this market. The consultation window is due to close in early January 2022. The FCA have recently expressed that they are already working on how this sector will be regulated.

The sheer quantity of daily transactions in the business world captured by the longstanding A60F exemption is overwhelming, but the aim of the consultation is to only capture those agreements which could lead to consumer detriment as identified by the FCA in the Woolard review and not impact simple invoicing by businesses where short periods of “credit” are provided to pay an invoice. This for clarity is the BNPL, Interest Free point of sale payment option you will see in virtually every high street retailer both in-store and online during check out that allows you to spread the cost over a period less than 12 months and 12 payments where no interest or fees are charged. (i.e. the cost of borrowing in zero)

The importance of regulation

Regulation for this sector is long overdue. 15 years ago, when advising clients on mortgages with a buoyant subprime sector it was clear that the, then unregulated, consumer credit sector was often to blame for creating credit score issues for clients. Clients were able to borrow unsecured credit with very few checks on the sustainability of repayments, which naturally squeezed budgets and resulted in poor credit scores. This increased the cost of borrowing or, as what happened when the credit crunch hit in 2008, left many financially excluded or trapped in mortgages with high variable interest rates. Yet here we are today, with 0% finance sold at virtually every checkout or basket online, easily facilitating the ability for consumers to build up seemingly limitless amounts of credit without the proper creditworthiness assessments.  When these numerous borrowings are added together they begin to create the same squeeze on monthly budgeting and could easily encroach on a consumer’s ability to pay regulated debts. The same knock on effect on credit scores and increased costs of borrowing occurs. In my opinion though, regulating the BNPL is not going to be as straightforward as many would think.

Striking the right balance

Finance providers in this sector make their money by taking a percentage of the loan amount from the retailer as opposed to charging interest or fees. Often this percentage is minimal (i.e. less than 5% of the amount borrowed). When you consider the implications of potentially providing Financial Ombudsmen Service (FOS) rights to consumers with such little return per loan, lenders might well find themselves less likely to offer such low cost finance when you look at what is currently happening to Claims Management Companies (CMC). Here the complaint culture is pushing well known and established lenders to the brink of existence, especially in the high-cost credit sector where the likes of Wonga, Quick Quid, Amigo and Brighthouse have all fallen by the wayside. Any belief that CMCs or consumers will not exercise their FOS rights if given in the BNPL sector, could well be misinformed.

In addition to the FOS, is the cost of giving Section 75 rights to consumers. For anyone who does not watch Martin Lewis, this is a consumer protection afforded on most regulated borrowing that makes the supplier and creditor jointly liable for issues arising from the credit agreement. It is what affords credit card purchases a higher level of protection and along with the cost of FOS complaints to lenders, means the cost of borrowing smaller amounts of money on regulated credit agreements is more expensive.

Don’t get me wrong, I am all for consumer protection, but these protections which have a financial impact on the lender are the areas that will need the most attention. Often if the FOS believe a consumer was lent to irresponsibly, they require the firm to put the customer back to the position they were in before the lending. This would typically result in a refund of interest and fees paid, but ultimately the consumer would still be responsible for the amount borrowed. Without the cost of borrowing to refund, there is very little financial detriment and would therefore only become a question of compensating ‘trouble and upset’ caused by the lending. An award which is often far less than the cost of the FOS referral fee to firms. This could fuel lenders to feel held to ransom with any complaint to just offer compensation and avoid the costly FOS referral fee.

Then there is the retailer who currently does not need to be authorised to broker these exempt credit agreements and will in most cases not want to be authorised considering the burden and cost this creates. Will this see a new wave of Appointed Representatives (as is expected in the funeral planning sector) or will it be the case that retailers will stop providing this payment option where they do not see a significant commercial benefit from offering point of sale credit? Retailers will also need to consider how regulation will affect the length of the queue behind the customer taking out the agreement and the true cost this presents on the time taken to transact.

Summary

Either way, regulation will have a significant impact in this sector and striking the right balance will be challenging albeit a very positive move; so watch this space and have your voice heard in the consultation process. You can view the full HMT consultation here and I am more than happy to discuss this further with any companies which have questions about the current authorisation process and what the likely FCA requirements will be.