About Innovate Finance
Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.

The UK FinTech sector covers businesses from seed-stage start-ups to global financial institutions who embrace digital solutions, playing a critical role in technological change across the financial services industry. FinTech has grown strongly since the Global Financial Crisis of 2007/8, which led to mistrust in traditional banks and coincided with an explosion in the use of smartphones, widespread adoption of the use of apps, the advent of blockchain technology, and significant investment in FinTech start-ups.

FinTech is synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally improved the ways in which consumers and businesses, especially small and medium sized enterprises (SMEs), access financial services.

Development of this consultation response

In preparing this response, we have engaged with a large cross section of our membership base, including challenger banks, other specialist lenders that support small- and medium-sized enterprises (SMEs), and the members of our innovation in consumer credit working group.

A clear consensus emerged amongst all members who provide BNPL products and agreements that are currently outside of the regulatory perimeter and for whom these proposals bite.

There is one member who provides innovative products in the consumer credit space that has a different point of view and disagrees with the consensus position (particularly with respect to questions 8, 10, 11, 15, 16, 17, and 18). This firm’s BNPL product differs significantly from those of the other members included within this document. Some of this firm’s BNPL products and offerings are fully regulated credit agreements with CCA and associated legal and regulatory frameworks already applying in full, and the firm itself holds an FCA licence. The views of this member are elaborated at the conclusion of the document.

The following views expressed in our paper is the consensus position of members who provide BNPL products and agreements that are currently outside of the regulatory perimeter and for whom these proposals bite.

Introduction and key points

Innovate Finance welcomes the opportunity to respond to HM Treasury’s (HMT) consultation on draft legislation for the regulation of Buy-Now, Pay-Later (BNPL). We are also grateful to HMT and FCA colleagues for their open and constructive dialogue with us and our members throughout the consultation period.

All of our members welcome the move to regulate the BNPL sector, and we have been calling for Government and the Financial Conduct Authority (FCA) to move at pace since the publication of the Woolard Review ¹. In particular, we welcome the additional consumer protections that will follow, including section 75 payment protection and recourse to the Financial Ombudsman Service (FOS).

From the outset, the Government acknowledged the sources of risk identified in the Woolard Review but stated that there is “[...] relatively limited evidence of widespread consumer detriment […]²”. It has also recognised that BNPL agreements are “[...] inherently lower risk than the majority of other regulated credit agreements.”³ As such, the Government indicated that it would adopt a tailored and proportionate approach, so that “regulation will not be overly burdensome or significantly impact the provision of interest-free credit”.⁴

Our members are supportive of a tailored and proportionate approach to the legal and regulatory framework for BNPL. This approach should balance and promote innovation, competition and the international competitiveness of the UK alongside robust consumer protections.
However, all our members are deeply concerned and consider the latest policy proposals and draft statutory instrument to be a material departure from the heavily trailed, ‘tailored and proportionate’ regime for BNPL. Our members consider that the measures, in aggregate, are more onerous than those that currently apply to regulated consumer credit products with a greater risk of harm such as credit cards.

Our members are primarily concerned by the aspects of the proposed regime summarised below, which we unpack in more detail in our response. Throughout our response, we also share proposed solutions that would go some way to mitigate the impacts on the FinTech firms and the consumers they serve.

Pre- and post-contractual disclosures are unsuited and disproportionate to the nature of the product and drive poor consumer outcomes

Though firms do not need to present the standard form Pre-Contract Credit Information (which replaced the SECCI⁵), the full Consumer Credit (Agreements) regulations 2010 are to be applied alongside other Consumer Credit Act 1974 (CCA) documentary requirements (e.g. signatures, provision of copy documents, right of withdrawal, etc.), which do not reflect the digital channels through which consumers enter into BNPL agreements and do not align well with the short-term, interest-free nature of BNPL products.

Research conducted by Fairer Finance⁶, and separately Which?⁷, evidenced that consumers find the current pre-contractual and contractual information inaccessible, and many consumers do not engage with it at all. Fairer Finance’s research also flagged up that the current regime does not work well for consumers with legally-recognised, protected characteristics, such as dyslexia or low vision.

The research undertaken by Fairer Finance showed that consumer understanding would be increased through innovative approaches to information sharing by firms — such as impartial, factual videos that summarise the benefits and downsides of a lending product, infographics, and better signposting to key information.

In a similar vein, our members are concerned by the Government’s decision to apply all of the post-contractual disclosures regime to the BNPL sector. Members are particularly troubled by the decision to retain NOSIAs⁸ which debt charities and other consumer groups have shown to drive poor consumer outcomes for certain consumer segments and sits at odds with the FCA’s consumer communications and understanding outcomes.
HMT has itself acknowledged⁹ that the BNPL sector has developed new methods of consumer communications (outside of the scope of the CCA and the regulatory perimeter), which are clear, timely and relevant. It is unfortunate that these novel approaches, which deliver on FCA Consumer Duty customer communications and understanding outcomes¹⁰, are being pushed to one side in favour of maintaining a slightly pared back version of the status quo.

Further, the proposed regime will lead to the introduction of excessive and disproportionate friction and drive consumers away from BNPL offerings to other forms of credit (most likely credit cards which are high interest and high risk for consumers) at such a rate that it casts doubts over the viability of firms’ UK operations. This has a direct knock-on for competition within the consumer credit market and the international competitiveness of the UK as a place to do business, and it undermines consumer protection objectives that underpin HMT’s policy intervention.

Scope does not capture BigTech and large retailers

The way in which the regime has been scoped could be abused by some BigTechs and large, online retailer platforms that are known to have entered the financial services space, offering interest-free instalment plans for the products that they sell via their platform. These firms have market dominance and a substantial balance sheet with which to underwrite a high-volume of short-term, interest-free credit offerings, which no FinTechs or small- and medium-sized (SME) retailers could match.

By not capturing BigTechs and large retailers within scope, the Government’s policy intervention may inadvertently drive anti-competitive effects in the UK’s consumer credit market as the anti-avoidance measures in the paper do not adequately or fully address the issue. It is not enough that HMT and other policy makers will monitor the market for any abuse of the loophole. We recommend that the Government adopt an analogous approach to that of EU policy makers reforming the Consumer Credit Directive.

Financial promotions: section 21 regulatory gateway

Our members are strongly supportive of the principles underpinning the UK’s financial promotions regime — i.e. promotions should be fair, clear and not misleading.

Not with standing this support of the underlying principles, our members consider that if the FCA’s s. 21 regulatory gateway regime (tied to financial promotion rules) is introduced before the BNPL sector is brought within the regulatory perimeter, then it could lead to a de facto marketing ban for many BNPL products at a time when many cash-strapped consumers depend on interest-free credit to help them manage their finances.
Policy makers need to consider the unintended consequences of distorting competition between existing BNPL players as a result of the financial promotions rules. The issues regarding financial promotions and the pool of third-party approvers impacts firms with offerings that are currently outside of the regulatory perimeter. It does not impact BNPL firms who offer other regulated credit agreements and are authorised by the FCA — these firms can approve their own financial promotions and do not need to secure the services of a third-party approver. All our BNPL members, who span both camps, are deeply concerned that this creates anti-competitive pressures within the market, if the Government takes no steps to create a temporary regime for impacted BNPL providers in the way that they did for the crypto sector.

We would reiterate that one proposed solution for the BNPL sector is for the Government and FCA to collaborate to introduce a similar, temporary regime for BNPL providers that are registered with the FCA for Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) purposes — in the way that they have done for the crypto sector — until the BNPL sector is brought within the UK’s regulatory perimeter.

Significant costs associated with compliance

Lastly, in terms of the costs that firms will incur, there is a range of impact from no less than £1.25M to £100M; this is a conservative estimate based on data points shared by our members. This range covers one-off and ongoing costs of compliance with the regime, and it does not take into account further costs that will be incurred as a result of new FCA rules and further CCA reform. The majority of Innovate Finance members have provided a detailed breakdown of these costs in response to HMT’s data request.

It is absurd that firms are being asked to bear these compliance costs for a regime that is both temporary and known to drive poor consumer outcomes — e.g. the pre- and post- contractual disclosure regimes. It is also totally out of lock-step with the policy approach from the FCA, which is increasingly moving to an outcome-based approach that affords firms the flexibility to tailor their approach to best meet the needs of consumers and deliver good outcomes.

We would be pleased to discuss this response in more detail with HMT colleagues and / or facilitate a roundtable discussion with our members and the wider FinTech ecosystem.

Questions and responses

Chapter 2: Policy position on the scope of regulation and draft legislation

Question 1: Do you have any comments on the proposed approach and/or drafting to bring agreements into regulation that are provided by a third-party lender in article 3(4) of the draft legislation?

As noted in our response¹¹ to the first HMT consultation paper on BNPL, our members welcome the move to regulate the sector, and they have been calling for Government and the FCA to move at pace since the publication of the Woolard Review¹². A legal and regulatory framework for BNPL that is tailored, proportionate and puts good consumer outcomes at the centre is essential to promote innovation and competition in the interest of consumers.

Therefore, while we have no objections in principle to bringing agreements into regulation that are provided by a third-party lender, we wish to flag up the unintended consequences of where the lines are drawn in the draft legislation. Please see our concerns about the scope, which does not capture BigTechs and large retailers, below.

We also wish to flag up the concerns around the introduction of FCA financial promotions rules ahead of the BNPL sector being brought within the regulatory perimeter — see our response to question ten for further details on the unintended consequences surrounding the financial promotions regime for the BNPL sector.

Limiting the scope to third-party lenders

In terms of unintended consequences owing to where the lines are drawn in the policy approach and draft legislation, our members are particularly concerned that large retailers and BigTechs are not captured within the scope of the regulatory regime. These concerns are also shared by Which?¹³ and consumer groups.

The way in which the regime has been scoped could be abused by some BigTechs and large, online retailer platforms that are known to have entered the financial services space, offering interest-free instalment plans for the products that they sell via their platform. These firms have market dominance and a substantial balance sheet with which to underwrite a high-volume of short-term, interest-free credit offerings, which no FinTechs or SME retailers ¹⁴ could match.

The Director of the US Consumer Financial Protection Bureau, Rohit Chopra, has commented ¹⁵ that his agency is taking a “very careful look [at] the implications of BigTech entering this space [i.e. BNPL]” and that “[...] it may reduce competition and innovation in the market”. From following the market, we note that there has been an uptick in recent merger and acquisition activity with large firms (including BigTechs) acquiring BNPL firms and BNPL-adjacent firms such as those offering open banking driven consumer credit information scoring — see for example, Apple’s acquisition of Credit Kudos, which came shortly before Apple unveiled its own BNPL offering in the US market.

While we recognise that the FCA is exploring the competition impacts of BigTechs in financial services¹⁶, the regulator is at very early stages in terms of its thinking, and it may be some years before any market and policy interventions take place, if at all.

Aside from the impacts on competition and innovation, our members are also concerned about the risk of consumer detriment: once the BNPL sector becomes regulated in the UK, consumers may mistakenly consider BNPL-style offerings from BigTechs and other large retailers to be regulated and carry the same protections.

In terms of helpful international approaches on this issue, we note that EU policy makers are alive to the issue of BigTechs and large retailers offering consumer credit products outside of the regulatory perimeter. The way in which the EU is proposing to tackle this issue is by amending the Consumer Credit Directive¹⁷, so that there is a distinction between BNPL products and services and large retailers that provide deferred payments. The draft language being discussed in the EU is below (though this could be subject to change), for ease of reference:

“[...] The exemption should also not cover certain suppliers, which have access to a very large customer base and which, considering their financial capacities, would be able to offer deferred payments in a very extensive way, without any safeguard for consumers and to weaken fair competition [...]”
We note that jurisdictions such as Australia and New Zealand are also taking steps to regulate the BNPL sector in such a way that BigTechs and large retailers are not excluded from scope.

By not capturing BigTechs and large retailers within scope, the Government’s policy intervention may inadvertently drive anti-competitive effects in the UK’s consumer credit market as the anti-avoidance measures in the paper do not adequately or fully address the issue. It is not enough that HMT and other policy makers will monitor the market for any abuse of the loophole. We recommend, therefore, that the Government adopt an analogous approach to that of EU policy makers reforming the Consumer Credit Directive.

Question 2: Do you have any comments on the proposed approach taken to bringing agreements into regulation where a lender purchases goods or services from the original supplier in the way set out in new draft paragraph 7A(b) in A60F?

No response.

Question 3: Do you consider that there may be unintended consequences of the government’s proposed drafting of the proposed legislation to capture these agreements?

Please see our response to question one.

Question 4: Do you have any comments on the proposed legislative approach and/or the drafting which seeks to ensure that agreements made by third-party lenders that finance premiums under contracts of insurance will continue to be exempt under A60F(2)?

No response.

Question 5: Do you think it is appropriate for there to be an exemption for interest-free borrower-lender-supplier credit agreements repayable in under 12 months in 12 or fewer instalments, where they are provided by registered social landlords to their tenants to finance the provision of goods and services?

No response.

Question 6: Do you have any comments on the proposed drafting which seeks to ensure that agreements that are offered by registered social landlords to their tenants and leaseholders, and where there is a third-party lender involved, will continue to be exempt under A60F(2)?

No response.

Question 7: Do you have any comments on the proposed drafting which seeks to ensure that agreements (i) where the borrowers are employees and, (ii) which result from an arrangement between their employer and the lender or supplier, will continue to be exempt under A60F(2)?

No response.

Chapter 3: Regulatory controls that will apply to newly regulated agreements

Question 8: Do you have any comments on the proposed legislative approach and/or drafting taken to exempting merchants from credit broking regulation?

Support for exempting merchants from credit broking regulation

All of our members are strongly supportive of the Government view that bringing merchants who introduce customers (typically this is at a point in the digital checkout flow) to BNPL firms within the scope of credit broking regulation would be disproportionate.

Unintended consequences flowing from the exemption and the erosion of the boundaries between fixed sum and running account credit

However, our members consider that there are unintended consequences and wider structural issues that will be entrenched as a result of the Government’s approach to regulating BNPL, including the application of this exemption to credit broking regulation.

Innovation in the consumer credit market, like BNPL, has slowly eroded the clear boundaries between fixed sum and running account credit. Many of our members that offer BNPL products and services do not fit neatly within either category i.e. fixed sum or running account credit. Equally, we see traditional credit providers, for example the major credit card issuers, offering new instalment plans to compete with FinTech offerings.

Each category of credit — i.e. fixed sum or running account — has differing legal and regulatory requirements that apply to the credit agreement document, post-contractual disclosures, and conduct and business rules. See, for example, the different requirements for statements relating to fixed sum credit (s. 77A CCA) versus statements relating to running account credit (s. 78(4) CCA). Firms’ failure to comply with fixed sum credit requirements under s. 77A means that they cannot, for example, charge interest on any sums due during the period of non-compliance; firms do not face the same consequences for non-compliance with running account credit requirements under s. 78. These differences could lead to arbitrage and perverse outcomes with some firms that do not neatly fit within either category opting for the categorisation that gives rise to the least onerous obligations and penalties for non-compliance with requirements.

Reflecting on HMT’s proposals, and the differing legal and regulatory requirements that apply, as described above, it would appear that HMT’s proposed policy intervention is inadvertently incentivising a move to a running account model. Indeed, some of our members received constructive challenge, in discussions with policy makers, that issues they have flagged up would largely be resolved under a running account model. However, based on the current proposals, firms who choose to align their business operations with a running account model would not be able to benefit from the credit broking exemption for their merchants, in contrast to firms who opt for a fixed sum model.

Given HMT is exploring the merits and demerits of maintaining the distinction between fixed sum and running account credit (in its work to reform the CCA), and the need for a level playing field to ensure that there is no distortion of competition within the market, our members recommend:

1. HMT clarifies and re-defines credit broking.It would be beneficial for the financial services and retail sectors to have a clear understanding of when credit broking might arise, whether any exclusions apply ¹⁸, and what the consequences may be (and for whom) as the boundaries of fixed sum and running account credit are now much less clear in the face of innovation in consumer credit. These issues are not satisfactorily explored in either of the consultation papers on CCA reform or the draft legislative framework for BNPL, as credit broking is regulated under the Regulated Activities Order¹⁹.For example, some retailers will look to partner with BNPL credit providers in order not to be captured by credit broking requirements, which present an onerous, ongoing compliance burden for SME retailers.However, this could lead to incorrect outcomes for consumers. For example, when purchasing big ticket items, such as white goods, the cost could be spread over 3 months at 0% interest — rather than 18% months at 0% interest — because the former is BNPL and the latter is fully regulated credit.As a shorter term equates to higher repayments for consumers, this is less “affordable” for many consumers, which may mean that certain consumer segments would not pass affordability assessments. This then leads to less access to low risk, low cost finance products for some risk segments and reduces overall competition in the consumer credit market.In many cases, the retailer in both scenarios will be acting in the same way i.e. there is no interaction or “selling” of credit. The retailers display standardised materials (approved by the credit issuer) on a website and the credit applications, underwriting and associated activities are handled and hosted by the credit provider. In the majority of our members' view, the risks and potential detriments are similar.
2. That the credit broking exemption should also apply to any BNPL firms who opt for a running account model.Our members recognise that applying this exemption to running account BNPL models may introduce risks. In order to mitigate these risks, our members propose that the exemption could be capped — for example, a £2000 maximum customer spend.

Question 9: Do you have any comments on the proposed legislative approach and/or drafting to regulate merchants as credit brokers when they are a domestic premises supplier?

No response.

Question 10: Do you have any comments on the proposed legislative approach and/or drafting which seeks to ensure that unauthorised merchants will be required to have their promotions approved by an authorised person?

Our members are strongly supportive of the principles underpinning the UK’s financial promotions regime — i.e. promotions should be fair, clear and not misleading.

Notwithstanding this support of the underlying principles, our members consider that if the FCA’s s. 21 regulatory gateway regime (tied to financial promotion rules) is introduced before the BNPL sector is brought within the regulatory perimeter, then it could lead to a de facto marketing ban for many BNPL products at a time when many cash-strapped consumers depend on interest-free credit to help them manage their finances.

In our response²⁰ to the FCA’s consultation on financial promotions (CP22/27), we flagged that we consulted BNPL providers and the firms which currently approve their promotions. We were able to identify fewer than five responsible, FCA-authorised firms who review and approve financial promotions for the crypto and/or BNPL sectors.

All of the third-party approver firms that we have spoken with told us that the FCA’s proposed £5000 application fee and reporting requirements are too onerous and will lead to third-party approvers exiting the market. Only one firm stated that it would continue its business operations, focusing on Appointed Representative (AR) work, but it would be very unlikely to apply to the FCA for a variation of permission to approve financial promotions in the future under the news. 21 regulatory gateway regime.

All of the firms with whom we have spoken voiced concerns that as the pool of responsible, UK-based third-party approvers shrinks, or disappears entirely, then firms without an FCA authorisation (such as some BNPL providers) could struggle to maintain their UK operations. So, there is clearly a risk of unintended outcomes of reducing competition and innovation as well as the international attractiveness of the UK as a place to start and scale a FinTech business. Responsible FinTech firms exiting the UK market also raises issues around possible consumer detriment if there are no measures in place to ensure firms have orderly market exits.

Further, we struggle to reconcile the Government and FCA’s policy intervention — which could lead to third-party approver firms disappearing entirely — with the regulators’²¹ focus on operational resilience. Central to regulators’ thinking on operational resilience and third-party risk management is the principle that firms should not place overreliance on a small number of third parties that are critical to their business operations. It seems perverse, therefore, that many of our members are being placed in this situation, notwithstanding their proactive procurement and due diligence exercises to identify suitable, alternative third-party approvers in the event that their current third-party approver ceases its operations — with the worst-case modelling indicating that there are no third-party approvers at all.

Along with competition issues surrounding BigTechs (see our answer to question one), policy makers need to consider the unintended consequences of distorting competition between existing BNPL players as a result of the financial promotions rules. The issues regarding financial promotions and the pool of third-party approvers impacts firms with offerings that are currently outside of the regulatory perimeter. It does not impact BNPL firms who offer other regulated credit agreements and are authorised by the FCA — these firms can approve their own financial promotions and do not need to secure the services of a third-party approver. All of our BNPL members, which span both camps, are deeply concerned that this creates anti-competitive pressures within the market, if the Government takes no steps to create a temporary regime for impacted BNPL providers in the way that they did for the crypto sector.

In light of the above, we flagged it would be helpful to understand if the FCA has fully considered the unintended consequences for these relatively nascent markets and UK consumers and the steps it will take to mitigate these risks. We have not yet received an update in this regard.

We would reiterate that one proposed solution for the BNPL sector is for the Government and FCA to collaborate to introduce a similar, temporary regime for BNPL providers that are registered with the FCA for AML/CTF purposes — in the way that they have done for the crypto sector — until the BNPL sector is brought within the UK’s regulatory perimeter.

This temporary regime would need to ensure that there is a level playing field between FCA authorised and unauthorised firms that offer BNPL products and services. For example, following the FCA’s Dear CEO letters²² and the Advertising Standards Authority’s (ASA) advice note²³, regulated firms that offer BNPL products were provided clarity that the FCA is the lead supervisor for technical aspects of financial promotions, rather than the ASA. In order for there to be a level playing field, the FCA would also need to take the lead on supervision and enforcement of financial promotions by firms without FCA authorisation. There should not be a position where firms without FCA authorisation are held to a higher standard than their authorised peers; and vice versa.

Question 11: Do you have any comments on the proposed legislative approach and/or drafting which seeks to disapply the CCA requirements on pre-contractual information for agreements that are brought into regulation?

HMT’s consultation paper on CCA reform²⁴ noted that the Government recognises that certain CCA requirements, for example on pre- and post-contractual information, particularly the timing of when this information must be sent, may need to be tailored for BNPL agreements given their sometimes very short-term nature.

Our members agree with this observation, and they welcome Government’s stated intention to disapply CCA requirements on pre-contractual information for agreements that are to be brought within the regulatory perimeter.

As HMT is exploring the merits and demerits of maintaining the distinction between fixed sum and running account credit (in its work to reform the Consumer Credit Act 1974), and there is a need to ensure that there is a level playing field and no distortion of competition within the market, our members consider that the same approach (disapplication of CCA pre-contractual requirements) should be applied to firms offering BNPL under a running account model.

Question 12: Do you have any comments on the proposed legislative approach and/or drafting to disapply the DMRs for unauthorised intermediaries where information is disclosed by lenders in accordance with the FCA's rules on distance marketing for authorised persons?

Our members are broadly supportive of the approach to disapply the Financial Services (Distance Marketing) Regulations 2004 (DMRs) for unauthorised intermediaries, in the scenario described. Without this disapplication of the DMRs, unauthorised brokers would have to provide information in accordance with the DMRs and authorised lenders would have to provide information in accordance with FCA rules, leading to duplication of information and burdens for the unauthorised intermediaries.

Question 13: Do you consider that this proposed approach will give firms sufficient flexibility to provide information in accordance with CCA pre-contractual requirements rather than the tailored regime for agreements that will be brought into regulation?

No response.

Question 14: Do you have any comments on the proposed legislation which seeks to disapply the small agreements provisions for agreements that will be brought into regulation?

In our response to HMT’s consultation on reform of the CCA, we flagged the importance of a level playing field between consumer credit providers. We note that the Government intends to disapply the s. 17 exemptions for BNPL agreements (when they become regulated), as many BNPL agreements are under the current £50 threshold.

The small agreements exemption has long been regarded as an anomaly. We concluded, in light of the Consumer Duty and other requirements on firms, it may make more sense to remove this exemption, in the interests of consistency and consumer protection.

Chapter 4: Transition to FCA regulation

Question 15: Do you have any comments on the proposed legislation that seeks to implement the TPR?

While industry welcomes the proposed introduction of a temporary permissions regime (TPR), all of our members have concerns in relation to the approach set out in the draft legislation.

These members are particularly concerned that relevant CCA provisions that HMT has decided to retain within the new BNPL regulatory regime will apply from Day One of the TPR; FCA rules will not apply until the TPR has ended.

It is inappropriate that the BNPL sector is required to comply with an incomplete regulatory regime, and that consumer protections will vary for customers who enter into an agreement when firms are in the TPR.

As an alternative, our members recommend that the entire regulatory regime is in place prior to that regime entering into force. Our members consider that it will be necessary for the Government, through legislation, to delay the implementation of the relevant CCA measures until FCA rules have been fully developed and the regime can be implemented appropriately and consistently. This will ensure that firms have enough time to prepare for the new regime and that customers can expect the full BNPL regulatory framework as agreed to apply from a set date.

As set out in response to earlier questions, some firms that offer BNPL products and services may wish to align their product under the running account model, which offers some benefits in terms of applying less onerous legal and regulatory requirements over the lifetime of a customer’s account.

Therefore, we would urge HMT and the FCA to consider how, and if, BNPL firms can use the TPR to apply for authorisation to offer running account BNPL — as well as the fixed sum BNPL model that has been set out in the consultation paper.

As the boundaries between fixed sum and running account credit are being worn away through innovations in the consumer credit market, our members consider that there should be flexibility, and policy interventions should not inadvertently incentivise firms to adopt one approach (fixed sum or running account) over the other. Without the assurance that both models will be eligible for the TPR, we consider that some firms could cease to offer short-term, interest-free BNPL products when ‘Regulation Day’ occurs and the TPR is in force.

Chapter 5: Regulatory controls not included in draft legislation

Question 16: Do you think that the requirements for the content of agreements set out in the Consumer Credit (Agreements) Regulations 2010 are proportionate to apply to agreements that will be brought into regulation?

All of our members strongly consider that the requirements for the content of agreements set out in the Consumer Credit (Agreements) Regulations 2010 are unsuited and disproportionate for BNPL agreements that are to be brought into regulation.

Though firms do not need to present the standard form Pre-Contract Credit Information (which replaced the SECCI), the full Consumer Credit (Agreements) regulations 2010 are to be applied alongside other CCA documentary requirements (e.g. signatures, provision of copy documents, right of withdrawal, etc.), which do not reflect the digital channels through which consumers enter into BNPL agreements and do not align well with the short-term, interest-free nature of BNPL products.

The approach seems to be entirely at odds with the ‘tailored and proportionate’ approach that had been previously trailed by HMT in response to its earlier BNPL consultation:

“[...] the Government’s view is that it remains appropriate for the requirements on the form and content of agreements to be prescribed in legislation, but that there should be a tailored approach given the lower risk involved in BNPL and STIFC agreements and how they tend to be used.”
HMT has itself acknowledged²⁵ that the BNPL sector has developed new methods of consumer communications (outside of the scope of the CCA and the regulatory perimeter), which are clear, timely and relevant. It is unfortunate that these novel approaches, which deliver on FCA Consumer Duty customer communications and understanding outcomes ²⁶, are being pushed to one side.

We know that consumers find the existing pre-contractual disclosures inaccessible. Fairer Finance’s research and report²⁷— Improving disclosure in the consumer credit market — found that prescriptive rules setting out what firms must tell their customers are often inhibitors to customer understanding, rather than enablers. As part of this research, survey participants were taken through a mocked-up customer application journey for a credit product. Survey participants were then asked a number of questions to test their comprehension about the product based on the disclosures that were presented to them. They were also asked questions about how they thought information could be better presented.

Key findings of the report included:

• Participants only spent three minutes (on average) reading the initial webpage and documents presented during the application process.
• Very few participants opened the summary box and terms and conditions; those that did spent under one minute reviewing this information.
• Participants only answered 39% of comprehension questions correctly after their initial reading of the mock application. Even after re-reading explanatory documents, correct answers only improved to 69% on average.
• One of the reasons participants gave for not reading the pre-contract credit agreement in any detail was the “daunting length”. They also noted it was written in a “dull, repetitive style with difficult-to-understand language”. The presentation and content of the pre-contractual information did not work well for those with legally-recognised, protected characteristics such as dyslexia.
• Consumer understanding would be increased through innovative approaches to information sharing by firms — such as impartial, factual videos that summarise the benefits and downsides of a lending product, infographics, and better signposting to key information.

The Fairer Finance research findings align with research from Which?²⁸ that showed aspects of the current prescriptive requirements of regulated credit are not helpful to consumers and do not present the key information consumers need to know in the best way. As a result of their research, Which? argued in response to HMT’s consultation that BNPL agreements are likely to require bespoke form and content requirements due to the nature of the product. Which? also stated that tailoring the content of BNPL agreements could be an opportunity to address the issues identified by their research and pinpoint the information relevant to these types of credit agreements.

In addition to concerns around consumer understanding and good outcomes, our members are concerned that the high degree of friction introduced by the pre-contractual disclosure regime coupled with other requirements threatens the viability of the entire BNPL model. While our members are committed to presenting the features of their products in the clearest and most transparent way possible, this must be balanced with a consumer journey which has appropriate levels of friction in order to ensure BNPL, which is inherently lower risk, continues to be a viable alternative to higher cost and higher risk credit cards.

If we follow the requirements set out in the consultation paper (which conceptually seems to treat BNPL agreements as a series of fixed sum agreements), each and every time a consumer enters into a BNPL agreement then firms must include the below as part of the customer journey, with each step adding friction:

• Affordability checks (with firms ensuring appropriate record keeping);
• Provide an adequate explanation (Consumer Credit sourcebook (CONC) 4.2.5R) in addition to the relevant pre-contractual disclosures;
• Obtain consumer’s signature of the credit agreement;
• Provide a 14-day right of withdrawal; &
• Provide a copy of the credit agreement.

Our members have modelled the impacts of the additional friction in their customer journeys — where the customer journey would typically take place in under two minutes, with the added friction this journey will now take more than five minutes.

See Figure One (below) which highlights that for consumers who use BNPL 12 times a year, it would be like they are applying for 12 credit cards and spending as much time on each BNPL transaction as they would if they were applying for a £25,000 loan for a car with a repayment schedule over 5 years. A YouGov survey²⁹ commissioned by a firm in the BNPL sector showed that 6 in 10 consumers believe that it should be harder to apply for a £25,000 loan than it is to make a purchase using BNPL. 80% also believe that it is wrong for the Government to introduce any new rules which would increase the time it takes to make a purchase using BNPL.

Figure One: Time taken to sign up and complete a purchase using a credit card compared with BNPL based on HMT’s current proposed regime

This disproportionate level of friction will lead to cart abandonment and consumers turning to other forms of payment and credit. In terms of alternative forms of payments and credit, research from Coadec³⁰ shows that BNPL credit is competing with credit cards, often linked to consumers’ digital wallets. Coadec found that 32% of all UK e-commerce transactions in 2020 took place through digital wallets with 50% of these transactions charged to a connected credit card. In contrast, only 5% of all e-commerce payments in 2020 were made via BNPL providers.

When you look at the levels of friction paying with a credit card via a digital wallet, it is so low as to be non-existent. One of our members conducted a series of interviews with consumers on the highstreets of the UK, during March 2023. When consumers were asked if they would use a BNPL payment option if the process to make a purchase were to take 3 times longer than it does now, one consumer stated that they would instead “opt to use my credit card because it [BNPL] just becomes less convenient” another said they “probably just wouldn’t use it [BNPL] anymore” on the basis that “it’s not as simple”. This is troubling as research conducted by YouGov ³¹ showed that only 55% of credit card customers said they only sometimes or rarely checked the terms and conditions for their card. That is why over 6 out of 10 credit card consumers (62%) have no idea what the annual percentage rate (APR) (i.e. the cost of that credit) is on their credit card, despite this being the most fundamental feature of the product. This is particularly worrisome given the recent increases in interest rates mean the effective interest rate on the typical credit card is now 20.11%.³²

It is unfortunate therefore that a major unintended consequence from added friction in the BNPL consumer journey will be consumers moving to costly, interest-bearing forms of credit. The projected volume of consumers pivoting to alternative payments and credit, owing to the excessive friction in the consumer journey, will seriously impact BNPL providers ability to maintain UK operations. All of this goes against Government’s aims to ensure that “regulation will not be overly burdensome or significantly impact the provision of interest-free credit”³³.

We would strongly urge HMT to reconsider its approach to pre-contractual disclosures, so that firms can deliver good customer outcomes and maintain viable business operations in the UK market. The ineffectiveness of current pre-contractual disclosure regime has been underlined by other stakeholders in previous papers and research, such as the FCA’s Review of retained provisions of the Consumer Credit Act ³⁴ in 2019, the Woolard Review ³⁵ in 2021 and the Finance and Leasing Association’s (FLA) more recent Future of Credit report ³⁶ published in February 2023. Innovate Finance recommends that the guiding principles should be to make the disclosures proportionate to the risks and nature of the products and readily accessible and inclusive for all consumers.

HMT has the power under section 107(6) of the Financial Services Act 2012 — the definition of a "transferred activity" is amended by section 37 of the Financial Services Act 2021 to include a "relevant credit activity" which means:
(3) "Relevant credit activity" means the activity of—
(a) entering into an agreement described in article 60F(2) or (3) of the Regulated Activities Order (certain borrower-lender-supplier agreements for fixed-sum credit or running-account credit) as lender, or
(b) exercising, or having the right to exercise, the lender's rights and duties under such an agreement, so far as the activity is not a transferred activity (as defined in section 107(1) of the Financial Services Act 2012).
HMT can use this power to amend the CCA plus statutory instruments made under the CCA like the Consumer Credit (Agreements) Regulations 2010 to better tailor the content of the disclosure to the nature and risk of BNPL products and amending execution and documentary requirements in relation to e.g. signatures, provision of copy documents, etc to better reflect digital channels and consumer preferences. This would create a far more proportionate regime.

Equally, we will be calling for the FCA to use its rule-making power to adapt the existing FCA Handbook rules (e.g. CONC 4.2 on pre-contract information) to be proportionate to BNPL.

Chapter 6: Impact Assessment and Equalities Impacts

Question 17: What do you expect the impact to be of this proposed legislation on providers of agreements that will be brought into regulation, consumers that use them and merchants that offer them as a payment option?

While our members are strongly supportive of the BNPL products being brought within the regulatory perimeter, they do not consider that HMT has set out a credible and viable framework for the sector that balances consumer protections with promoting competition, innovation and the international competitiveness of the UK as a place to start and scale a FinTech business.

It is unfortunate that HMT did not provide a cost-benefit analysis alongside this consultation paper. Instead the onus has been placed on industry to evidence the unintended consequences of the shifting policy approach captured by the draft legislation, leaving little time for the Government to course correct its approach.

Below, we share our assessment of the impacts on FinTech firms that provide agreements that will be brought into regulation and on consumers that enter into these agreements. We also share some proposed solutions that would go some way to mitigate the impacts on the FinTech firms and the consumers they serve.

Impacts

FinTech firms that offer BNPL products are now faced with burdensome costs to stand up teams and associated systems, processes and controls to comply with elements of the outdated CCA regime that are disproportionate to the risks posed by BNPL products.

In terms of the costs that firms will incur, there is a range of impact from no less than £1.25M to £100M; this is a conservative estimate based on data points shared by our members. This range covers one-off and ongoing costs of compliance with the regime, and it does not take into account further costs that will be incurred as a result of new FCA rules and further CCA reform. The majority of Innovate Finance members have provided a detailed breakdown of these costs in response to HMT’s data request.

It is absurd that firms are being asked to bear these compliance costs for a regime that is both temporary and known to drive poor consumer outcomes — e.g. the pre- and post- contractual disclosure regimes. It is also totally out of lock-step with the policy approach from the FCA, which is increasingly moving to an outcome-based approach that affords firms the flexibility to tailor their approach to best meet the needs of consumers and deliver good outcomes.

We cover the impacts of the pre-contractual and associated requirements in response to question 16, above. In short, the excessive and disproportionate friction is likely to drive consumers away from BNPL offerings to other forms of credit (most likely credit cards which are high interest and high risk for consumers) at such a rate that it casts doubts over the viability of firms’ UK operations. This has a direct knock-on for competition within the consumer credit market and the international competitiveness of the UK as a place to do business, and it undermines consumer protection objectives that underpin HMT’s policy intervention. Any exits from the market could incentivise others such as large retailers and BigTechs to step in — see our response to question one for further detail on the concerns for competition and consumer protection if the loophole in the scope is left unchanged.
Further, while HMT has not invited comments on the Government’s decision to retain the entirety of the post-contractual regime, we wish to flag up that our members are deeply concerned by the decision to retain NOSIAs ³⁷ which debt charities and other consumer groups have shown to be problematic for certain consumer segments.

CCA and FCA Handbook requirements relating to NOSIA undermine the consumer understanding outcome under the FCA’s new Consumer Duty. The NOSIA rules require lenders to send a letter where consumers fall two or more payments behind on their loans. Lenders must also issue subsequent notice of sums in arrears (SNOSIA) every six months after the initial NOSIA, until consumers are up to date with their repayments. The wording of the NOSIA and SNOSIA is prescribed by law.

Lenders are required to send these notices even where consumers have entered into an agreed forbearance arrangement. For consumers with an agreed forbearance arrangement with their lender, particularly those consumers with characteristics of vulnerability, the receipt of SNOSIAs can cause unnecessary confusion and distress — ultimately giving rise to poor consumer outcomes.

In our response to the FCA’s consultation on the Consumer Duty, we urged the regulator to provide further guidance on ‘what good looks like’ for firms as they balance the need to meet prescriptive regulatory and/or legislative requirements and consumer understanding outcomes.

As well as NOSIAs/SNOSIAs, firms must also comply with other post-contractual information requirements over the lifetime of the contract. This includes annual statements ³⁸, statement of account³⁹, notice of default sums ⁴⁰, default notices ⁴¹ which must be sent in paper form, etc. — as with the pre-contractual requirements, these are disproportionate and ill-suited to the features of BNPL products and the agreements. We recognise that some of these requirements, for example annual statements, are likely to apply to a very limited number of customers. However, firms are not able to disregard the obligation to provide them, and the consequences of not meeting these obligations are draconian. It follows that the capabilities, systems and controls have to be built, which is completely disproportionate to the intended customer protection.

In the same way that some of our members have developed innovative approaches to pre-contractual disclosures, which are tailored to customers’ needs, some of our members are trialling new information sharing that is more effective than the outdated post-contractual information requirements. These approaches include sending reminders of upcoming payments in advance to allow consumers time to manage their money in order to make payment or to defer payment (‘snooze’) if they need more time.

Lastly, we also flagged up in response to question ten the impacts of the FCA’s proposed s. 21 regulatory gateway for the approval of financial promotions. This could distort competition between existing BNPL players as a result of the financial promotions rules. The issues regarding financial promotions and the pool of third-party approvers impacts firms with offerings that are currently outside of the regulatory perimeter. It does not impact BNPL firms who offer other regulated credit agreements and are authorised by the FCA — these firms can approve their own financial promotions and do not need to secure the services of a third-party approver. All of our BNPL members, which span both camps, are deeply concerned that this creates anti-competitive pressures within the market, and some firms may have no choice but to wind down their UK operations.

Solutions

As noted in response to question sixteen, HMT does have the power under s. 107(6) of the Financial Services Act 2012 to amend the CCA and the statutory instruments made under the CCA to create a proportionate and tailored regime. We would urge HMT to move at pace to create a more proportionate regime for the sector while we await wider CCA reform.

With respect to financial promotions, we reiterate the solution set out in response to question ten. In short, this would be for the Government and FCA to collaborate to introduce a similar, temporary regime for BNPL providers that are registered with the FCA for AML/CTF purposes — in the way that they have done for the crypto sector — until the BNPL sector is brought within the UK’s regulatory perimeter.

This temporary regime would need to ensure that there is a level playing field between FCA authorised and unauthorised firms that offer BNPL products and services. For example, following the FCA’s Dear CEO letters⁴² and the ASA’s advice note⁴³, regulated firms that offer BNPL products were provided clarity that the FCA is the lead supervisor for technical aspects of financial promotions, rather than the ASA. In order for there to be a level playing field, the FCA would also need to take the lead on supervision and enforcement of financial promotions by firms without FCA authorisation. There should not be a position where firms without FCA authorisation are held to a higher standard than their authorised peers; and vice versa.

Question 18: Do you agree with the provisional assessment that, on balance, the government's proposed proportionate approach to reform mitigates the negative impacts on those sharing particular protected characteristics and retain the positive equalities impacts of the products?

Our members consider that the Government has not pursued a proportionate approach to reform, and there are ramifications for consumers with legally-recognised protected characteristics, as well as others who have characteristics of vulnerability. See our response to question 16, which highlights the Fairer Finance and Which? research findings.

Question 19: Do you have any further data you can provide on the potential impacts on persons sharing any of the protected characteristics

Please see our response to question 16, which highlights the Fairer Finance and Which? research findings.

Notes:

Development of this consultation response

As noted above, a clear consensus emerged amongst all members who provide BNPL products and agreements that are currently outside of the regulatory perimeter and for whom these proposals bite. There is one member who provides innovative products in the consumer credit space that has a different point of view and disagrees with the consensus position (particularly with respect to questions 8, 10, 11, 15, 16, 17, and 18). This firm’s BNPL product differs significantly from those of the other members included within this document. Some of this firm’s BNPL products and offerings are fully regulated credit agreements with CCA and associated legal and regulatory frameworks already applying in full, and the firm itself holds an FCA licence. We have set out below a summary of how this firm takes a different view.

This member is broadly supportive of the Government’s proposed framework for BNPL and does not consider that the regime is disproportionate or has a negative impact on innovation, competition or the international attractiveness of the UK as a place to start and scale a FinTech business. This member accepts that this is step one to bring BNPL firms into the same regulatory framework as all regulated firms — and that there will be a step two which streamlines CCA and that the value in bringing BNPL firms all into regulation is an important and necessary first step for the industry. This member has no objections to the pre- and post-contractual regime that will be applied to BNPL agreements that are to be brought into the regulatory perimeter, and this member does not believe that these regimes have any negative impacts on persons with legally-recognised protected characteristics, or characteristics of vulnerability. The member also does not recognise that the pre-contractual information regime will have a negative impact on the user experience and volumes for the industry. Further, this member does not recognise the concerns of firms that offer BNPL products and rely on third-party approvers for their financial promotions. This member also does not recognise the concerns regarding the Temporary Permissions Regime (TPR). In short, this member wishes to see the legislation and TPR, as it currently stands, be introduced as soon as possible.

[ENDS]

1 https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf

2 HM Treasury Regulation of Buy-Now Pay-Later: Consultation (October 2021), page 11, paragraph 2.14

3 Ibid. See page 6, paragraph 1.10. 

4 HM Treasury Regulation of Buy-Now Pay-Later: Response to Consultation (June 2022), page 13, paragraph 2.33. 

5  Standard European Consumer Credit Information. Post-Brexit, the SECCI and “ECCI” (the European Consumer Credit Information) were replaced by Pre-Contract Credit Information and the Pre-Contract Consumer Credit Information (Overdrafts).

6 https://www.fairerfinance.com/assets/uploads/images/producttypes/Credit-market-disclosure-March-2023.pdf

7 https://media.product.which.co.uk/prod/files/file/gm-2ae87d3e-d955-420c-bb8c-dbea2170e984-which-response-to-hmt-consultation-on-regulation-of-buy-now-pay-later-consultation-on-draft-legislat.pdf

8 Notice of sums in arrears (NOSIA).

9 Regulation of Buy-Now Pay-later: Consultation on draft legislation, February 2023

10 Consumer understanding outcome requires firms to deliver communications that: meet their customers' needs; are likely to be understood by customers; and enable and support them to make effective, timely and informed decisions in addition to being fair, clear and not misleading.

11 https://www.innovatefinance.com/blogs/innovate-finance-response-to-hm-treasury-regulation-of-buy-now-pay-later-consultation/

12 https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf

13 https://media.product.which.co.uk/prod/files/file/gm-2ae87d3e-d955-420c-bb8c-dbea2170e984-which-response-to-hmt-consultation-on-regulation-of-buy-now-pay-later-consultation-on-draft-legislat.pdf

14  From market analysis, we have observed that many SME retailers do not offer their own credit and/or BNPL products (owing to operational complexities including credit risk assessment and the associated compliance burden) and rely on third parties – regulated (credit brokers) or unregulated (BNPL). Large retailers and BigTechs have market dominance compared with these SME retailers, and the loophole in the scope is likely to allow BigTechs and large retailers to further their competitive advantage by enabling them to offer an unregulated product at lower cost. Even in instances where a large retailer serves as a marketplace and helps SME retailers gain visibility, the construction of the anti-avoidance provisions would mean that an unregulated product such as BNPL could not be offered. This may mean that a lower cost, more easily accessible form of credit would not be available for these SME sales and may distort competition in favour of direct sales by the large retailer that acts as a marketplace.

15  https://www.ft.com/content/399c177f-e5da-491a-b653-afe953bbdce0?shareType=nongift

16  Linked here for reference is our response to the FCA’s discussion paper: https://www.innovatefinance.com/consultation/fca-discussion-paper-dp22-5-the-potential-competition-impacts-of-big-tech-entry-and-expansion-in-retail-financial-services-dp22-5-innovate-finance-response/

17  Consumer Credit Directive (2008/48/EC)

18  Adding greater clarity around the exemptions as set out in sections 36B through 36G of the Financial Services and Markets Act 2000 (Regulated Activities) Order.

19  Carrying on a credit broking activity in the way of business is a regulated activity under article 36A of the Financial Services and Markets Act 2000 (Regulated Activities) Order (SI 2001/544) (RAO).

20 https://www.innovatefinance.com/consultation/fca-consultation-on-introducing-a-gateway-for-firms-who-approve-financial-promotions-cp22-27-innovate-finance-response/

21 Operational Resilience is a tier one priority for the FCA, PRA and BoE. See for example, FCA 2023/34 Business Plan and PRA 2022/23 Business Plan.

22  https://www.fca.org.uk/publication/correspondence/bnpl-dear-ceo-letter-2022.pdf

23  https://www.asa.org.uk/advice-online/consumer-credit.html

24 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1122395/CCA_CP_211122_Final_Review.pdf

25 Regulation of Buy-Now Pay-later: Consultation on draft legislation, February 2023

26 Consumer understanding outcome requires firms to deliver communications that: meet their customers' needs; are likely to be understood by customers; and enable and support them to make effective, timely and informed decisions in addition to being fair, clear and not misleading.

27 https://www.fairerfinance.com/assets/uploads/images/producttypes/Credit-market-disclosure-March-2023.pdf

28 https://media.product.which.co.uk/prod/files/file/gm-2ae87d3e-d955-420c-bb8c-dbea2170e984-which-response-to-hmt-consultation-on-regulation-of-buy-now-pay-later-consultation-on-draft-legislat.pdf

29  YouGov (2023, unpublished). Total sample size was 2036 adults. Fieldwork was undertaken between 3-4 April 2023. The survey was carried out online. The figures have been weighed and are representative of all GB adults (aged 18+).

30  https://coadec.com/wp-content/uploads/2021/07/Regulate-Now-Reform-Later-July-2021.pdf

31  YouGov (2021) ‘Survey on consumer understanding of BNPL and

pre-contractual information’

32  Bank of England (2023) ‘Money and Credit - February 2023’, Bank Of England Database. Available at: https://www.bankofengland.co.uk/statistics/money-and-credit/2023/february-2023

33 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1083547/BNPL_consultation_response__Formatted_.pdf

34 https://www.fca.org.uk/publication/corporate/review-of-retained-provisions-of-the-consumer-credit-act-final-report.pdf

35  https://www.fca.org.uk/publication/corporate/woolard-review-report.pdf

36  https://www.fla.org.uk/business-information/documents/the-future-of-credit/fla-future-of-credit.pdf

37  Notice of sums in arrears (NOSIA).

38  See section 77A CCA and the Consumer Credit (Information Requirements) Regulations 2007

39  See section 77B CCA

40  See section 86E CCA and the Consumer Credit (Information Requirements) Regulations 2007

41  See sections  87/88 CCA and the Consumer Credit (Enforcement, Default and Termination Notices) Regulations 1983

42  https://www.fca.org.uk/publication/correspondence/bnpl-dear-ceo-letter-2022.pdf

43  https://www.asa.org.uk/advice-online/consumer-credit.html