This week’s ‘Response to consultation’ paper from HM Treasury sets out the Government’s plans for regulation of Buy Now Pay Later finance. Reactions were mixed. The BNPL lenders’ PR machines are welcoming the new regulation, while Moneysaving Expert’s founder Martin Lewis criticised the “painfully slow” pace of progress.
Apart from the long delays, the current proposals make consumer credit regulation far more complicated. They also risk distorting the retail finance market, as short-term credit providers will face different regulation to longer-term providers - despite longer-term credit typically being cheaper per period and therefore arguably more affordable:
Exemption of retailers from FCA regulation: Even though interest-free credit up to 12 months will become regulated, retailers and others introducing such credit will be exempt. HMT states “minimal risk of brokers pushing consumers to products unsuitable for their needs because they do not earn commission and instead pay a fee to the lender to provide the credit”. But the same arguments apply to most retail point of sale finance over 12 months, where it is rare that retailers earn a commission, and many retailers subsidise longer term interest-free credit.
Pre-contractual information requirements: The Government intends to ‘disapply’ existing regulatory requirements for pre-contractual information for BNPL, apparently on the basis that they are disproportionate, ‘given the level of risk associated with these agreements.’ But longer term retail finance agreements will still be subject to the information rules, with no clear rationale.
The whole premise of HM Treasury’s position is that BNPL providers are currently using an exemption to the regulation for fixed sum credit, so the exemption needs to be removed. But most BNPL is closer to running account than fixed-term credit: Consumers typically use BNPL accounts on a rolling basis, and lenders apply credit limits to each customer.
For that reason, it’s likely the exemption doesn’t apply today, although it would take a test case to determine that. Alternatively, the Government could amend the exemption to remove any doubt. There’s a separate exemption for running account credit, but the way it is worded, it wouldn't apply to BNPL (for more on this see my earlier blog).
The sage of consumer credit regulation, Goode, in Guide to the Consumer Credit Act (1979) described the terminology of the CCA as a ‘highly successful endeavour to encompass not only the extraordinary diversity of forms of consumer credit currently used but also forms not yet conceived that may one day appear on the English financial scene’. He noted that with the CCA, Parliament ‘abandoned a legal structure based on differences in legal form and has instead produced a pattern of regulation which classifies transactions according to their function and effect’.
Where BNPL is used on a continuous basis by consumers it has the function and effect of running account credit, not fixed-term. BNPL may not have been conceived at the time of the drafting of the CCA, but it seems that the legislation still works for it today - if correctly (or boldly) applied.
Clarifying the scope of the exemption would solve the BNPL regulatory problem without having to complicate the existing regulation and without risk of distorting the market.
Why is this not even mentioned by HM Treasury? Perhaps this regulatory process is now considered to be too far down the line to allow policy makers to contemplate going back to basics. Yet that is exactly what is needed now to achieve the right outcomes for consumers and the credit industry.
Patrick Jenkins, writing in the Financial Times on 6 June, said “It is time to regulate this industry properly before it blows up in all our faces”. Fortunately, there’s still a much easier, simpler, and more effective solution just waiting to be deployed.
For more on the BNPL market, including the shift to 'over the top' solutions, see my blog here