UK government announces further details of reform of unregulated consumer credit

The Treasury published its response to a consultation (39 pages / 339KB PDF) on the regulation of these products, which allow customers to spread the full cost of a purchase over time and are rapidly increasing in popularity, earlier this week. BNPL and STIFC agreements are not currently regulated, so borrowers do not benefit from the consumer protections lenders are required to build into regulated consumer lending products.

Earlier this month, the government announced it will move much of the 1974 Consumer Credit Act into the remit of the Financial Conduct Authority (FCA). Ministers said the change would allow the regulator to respond faster to emerging developments in the consumer credit market.

Rachael Preston, financial regulation expert at Pinsent Masons, said: “The government must ensure that the proposed changes to the regulation of BNPL and STIFC products align with the wider reforms to the consumer credit market. Businesses will be keen to avoid the disruption of having to implement one set of rule changes in the short term, only to have to revisit their approach later on.”

Under the government’s proposals, BNPL and certain STIFC lending will become regulated and lenders will be required to comply with a raft of consumer credit rules that already apply to regulated consumer credit. Importantly, under the proposed rules, borrowers will be able to take complaints about BNPL or STIFC products to the Financial Ombudsman Service (FOS), affording an additional layer of consumer protection.

Preston said: “The proposal is for many of the existing rules and laws that apply to regulated credit to be applied also to BNPL and STIFC products. This includes the financial promotion rules, credit agreement form and content requirements, creditworthiness assessments and rules relating to arrears, default and forbearance. This proposal is a clear indication of the government’s concerns with the BNPL and STIFC market and the potential risk of harm it poses to the consumer.”

Although ministers initially only planned to regulate BNPL products, they said the scope of the reforms would be widened to cover other forms of unsecured STIFC that pose similar risks to consumers, including those typically used in subscription models such as for gym and club memberships and by healthcare providers. They said there was a “diminishing distinction” between BNPL and STIFC products that increased the need for “consumer clarity on the rights and protections they can expect”.

The rules will also apply to businesses who partner with a third-party lender to provide STIFC, although the government has asked for further stakeholder feedback on whether the rules should also apply to online merchants who directly offer credit for the purchase of their own products. The government said it will allow exemptions for specific agreements where there is limited risk of potential consumer detriment, and where regulation would otherwise adversely impact day-to-day business activities.  

Andrew Barber, consumer finance expert at Pinsent Masons, said: “The government should proceed with caution with its proposed extension of the regulatory perimeter to STIFC when provided directly by merchants where it is offered online or at a distance. Depending on the final rules, such an approach could significantly disrupt what is a legitimate method offered by many businesses to encourage sales of their goods and services, ultimately stifling competition and reducing consumer choice.”

He added: “Many firms operating in the BNPL space will argue that the proposed approach is disproportionate, particularly where the value of the underlying agreement is low. It remains to be seen whether the rule changes will force participants out of the market on the grounds either that it is no longer commercially viable, or that the rules are too complex to implement from a legal or operational perspective. The government may of course argue that is exactly what is needed to prevent customer harm.”

The government plans to publish a fresh consultation on draft legislation toward the end of this year. Ministers then intend to lay secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.