[co-author: Anna Lewis-Martinez]

The Woolard Review emphasises the urgency to bring all BNPL products under FCA supervision and sets out recommendations for the unsecured credit market.

The UK government has announced that interest-free buy-now-pay-later (BNPL) credit agreements will be regulated by the FCA. Currently, the BNPL market operates under an exemption from regulations for consumer credit lending.

The announcement comes as a review of the unsecured credit market, led by Christopher Woolard, unexpectedly urgently recommends regulating all BNPL products.

The Woolard Review (Review) sets out 26 recommendations for the FCA, UK government, and other bodies to reform the unsecured credit market. The recommendations take into account the impact of the COVID-19 pandemic, changing business models, and new developments in unregulated BNPL unsecured lending.

Buy Now Pay Later

Unregulated BNPL products rely on an exemption found in Article 60F(2) of the Regulated Activities Order (RAO) for credit agreements that are interest- and fee-free, and are repayable within in a period of 12 months or less. As such, they currently fall outside the FCA’s perimeter, and providers of credit are not required to be authorised by the FCA.

The Review recommends that the FCA urgently work with the Treasury to create legislation to ensure that all BNPL products are brought within the scope of regulation to better support a healthy unsecured lending market. Once the FCA has obtained the necessary powers, the FCA will need to develop a proportionate regulatory framework, including addressing how credit information should work within this market. The Review states that an exemption should still be available for agreements outside the BNPL market, including for “short-term invoice deferral” and for items such as gym memberships, dental payment plans, and sports club membership fees.

Once unregulated BNPL products are brought within the regulatory perimeter, lenders will need to be authorised and regulated by the FCA. Lenders will be subject to appropriate high-level regulation but also to a regime that is proportionate and caters to the wide variety and number of partner retailers, which will be required to become authorised credit brokers when they refer their customers to BNPL providers. The option of becoming an Appointed Representative for credit broking instead of becoming individually authorised could be an attractive option for some firms not wishing to obtain a licence and, which would still allow them to refer customers to BNPL lenders. Lenders will be required to carry out affordability checks on all customers before lending and to ensure that they treat consumers fairly, particularly those who are vulnerable or struggling with repayments. Firms will also have to comply with the financial promotions regime, and customers will be able to escalate any complaints to the Financial Ombudsman Service — a protection that customers do not currently have.

The UK government has stated that legislation will be brought forward as soon as parliamentary time allows. However, before this, the UK government still needs to launch a consultation on how the regulation should be implemented and to ensure that its approach is proportionate. It is, therefore, possible that it will be two or more years before there is any change in law. However, Woolard states in the Review that given the immediate passage of the Financial Services Bill through Parliament, he has already written to Treasury ministers about the matter, suggesting a possible imminent amendment to the Financial Services Bill and emphasising the urgency with which this matter is being dealt with.

Many questions remain unanswered. Will we see a similar transitional period, as was allowed for the transfer of regulation to the FCA, to allow lenders to run off their books if they choose not to seek authorisation? Will the additional authorisation costs, and continuing costs of compliance, force many lenders out of the market? Will this create opportunities for some of the larger firms to expand into the BNPL space? Only time will tell.

The BNPL space has attracted a large amount of investment in recent years, including in the private equity arena and in relation to the securitisation of consumer receivables. Given that regulation of these products was not previously on the horizon, investors will want to check that they have sufficient contractual protections to protect their positions and investments as BNPL providers consider their options.

Debt Advice

According to the Review, the FCA must urgently coordinate with the UK government, devolved administrations, and insolvency regulators to ensure that suitable debt solutions are available to best serve people in financial difficulties. In particular, the FCA and the UK government must ensure that the imminent demand for debt solutions as a result of the COVID-19 pandemic is met. This response should include identifying quick actions to remove or reduce barriers to accessing suitable solutions (including fees) and steps to reduce the number of consumers being driven towards unsuitable solutions (including the role that marketing plays in this).

The Review emphasises that debt solutions must be suitable — meaning known problems in the personal insolvency sector need addressing — and fees for debt relief orders should not prevent people who are less well off from accessing the help they need.

Forbearance

The Review encourages the FCA, in conjunction with lenders and credit reference agencies (CRAs), to conduct a review of how forbearance is reflected in credit information and how this affects decisions made by lenders and consumers. This review should:

• Assess the potential impact of the approach taken to the “masking” of credit files
• Look at the current arrangements for reporting forbearance to CRAs and whether these are consistent and adequate
• Identify any areas where credit information could better reflect individual consumer circumstances and respond in a more nuanced way to changes in those circumstances (e.g, a “neutral” marker that indicates an individual needs help because of COVID-19 on a longer-term basis)

Other Key Recommendations

Other recommendations in the Review include:

• Providing more alternatives to high-cost credit
• Building a better credit information market, underpinning a sustainable credit market and better lending decisions
• Ensuring that regulation of the credit sector is more outcomes focused, looking at how products are used in the real world and consistently regulating on that basis
• Providing guidance for digital design in the consumer credit sector that focuses on good consumer outcomes, to ensure that consumers are informed and remain in control of their decision-making
• Reviewing repeat lending

Next Steps

The FCA has confirmed that it welcomes and supports the recommendations in the Review, recognising the urgency to regulate all BNPL products.

The FCA has already written to the Treasury setting out its views and proposing that the FCA work with the UK government to define the appropriate regulatory framework. In April 2021, the FCA will publish its 2021/22 Business Plan, which will further detail the FCA’s response to the Review.