What Does The Future Regulation Of Buy Now Pay Later Look Like And What Does It Mean For Merchants?

• Law Firm: Gowling WLG
• Subject Matter: Finance and Banking, Consumer Protection, Government, Public Sector, Financial Services, Constitutional & Administrative Law, Dodd-Frank, Consumer Protection Act
• Author: Ms Sushil Kuner and Yasmin Gidda
• Published date: 17 May 2023

Background

His Majesty's Treasury (HMT) announced in February 2021 its intention to regulate interest-free Buy Now Pay Later ("BNPL") products. In November 2021, it followed up with a consultation paper on the proposed approaches to regulation of BNPL ("the Consultation") and, following a period of consultation, published its Response to the Consultation in June 2022 ("the Response"). We summarised key aspects of the Consultation and the Response in our earlier Insight articles 'HMT consults on the regulation of Buy Now Pay Later credit products' and 'HMT refines scope of regulation for Buy Now Pay Later'.

While the overall policy options set out in the Consultation remained largely unchanged in the Response, the potential scope of regulation remained unclear. The Government therefore invited stakeholders to provide further feedback on the scope of future regulation, following which it has recently issued a consultation paper on the draft legislation ("the CP"), together with the BNPL draft statutory instrument ("the Draft Legislation"). In this Insight, Sushil Kuner and Yasmin Gidda summarise the key aspects of the CP and the Draft Legislation and outline what this all means for merchants currently offering BNPL.

Policy position on the scope of regulation

There is currently an exemption for credit lenders whereby interest and cost free creditor-lender-supplier agreements which are repayable in under 12 months and in 12 or fewer instalments are not regulated credit agreements ("the Exemption"). The Government has previously made the following distinction between BNPL and Short Term Interest Free Credit ("STIFC"), both of which currently benefit from the Exemption:

• BNPL - usually taken out online with consumers often having an overarching relationship with a third-party lender, under which multiple low value agreements are made, with little transactional friction as a result.
• STIFC - frequently offered in-store, with consumers taking out a single, higher-value discrete agreement with the credit provider who may be a third party lender or the merchant itself. The FCA's initial view was that this is a more traditional form of credit, which has operated for many years without raising significant concerns of consumer detriment.

At the time of the initial Consultation, the Government proposed a proportionate approach to regulation by ensuring that the scope of regulation is defined as closely as possible to target those currently exempt credit products where there is most potential for consumer detriment (i.e regulating BNPL only and not STIFC). However, as a result of feedback from respondents to the Consultation that developments in the market blurred the distinction between BNPL and STIFC, the Government indicated in the Response that it was minded to extend the scope of regulation to capture:

1. both BNPL and STIFC agreements where they are provided by third party lenders; and
2. STIFC agreements that are provided directly by merchants online or at a distance, given their potential to create the same risks as BNPL agreements and STIFC agreements provided by a third party lender. This would ensure that agreements offered directly by large e-commerce merchants would be regulated and would also mitigate the risk of BNPL providers avoiding regulation by structuring agreements, so that...