W&F Q1 2023

Nov22526 Q1 Wealth & Finance Jun21296 BNPL BNPL is not currently regulated as it falls under the rules for shortterm interest-free credit offered by merchants like newsagents. How do you expect the government to change the rules for BNPL and why? I believe that the new rules will be expected to reflect existing rules that apply to regulated products, with some proportionality built in to avoid excessive regulatory burden on firms or information overload for customers. The government’s recent consultation discussed introducing rules on financial promotions, affordability, credit reporting, provision of information to customers, arrears and default management and forbearance, complaints and other consumer protections such as section 75 of the Consumer Credit Act (“CCA”). It seems that merchants will not be required to obtain FCA authorisation to broker BNPL products to third-party lenders and that the regulation applied to the lenders offering these products is expected to drive improvements in the sector. This is an understandable position, given that many small merchants will not have the resources or skills to meet and maintain the regulatory requirements that come with being authorised. It also makes sense from the FCA’s perspective, considering the huge number of applications for authorisations they could receive if merchants did need to become authorised or the potentially huge number of merchants who would be appointed as Appointed Representatives of authorised firms to continue brokering these products. Overall, I think the proposals strike a fair balance. The fact that these credit products are interest-free, does not mean that they are riskfree. The regulations will enable customers to make more informed decisions at checkout about the finance options available, enforcing lenders to take steps to assess the sustainability of repayments and giving customers equal protections regardless of the finance option they choose. As an added benefit, the affordability assessments that regulated lenders are performing will be enhanced by the inclusion of BNPL products in credit reference data.” From a regulatory point of view, I expect the regulations to take the form of FCA rules, rather than significant revisions to old legislation. This should coincide well with the planned reforms of the CCA and secondary legislation and will also allow for read-across with the incoming Consumer Duty, which will further enhance expectations on firms to deliver good outcomes for their customers. More background The BNPL market has huge potential to benefit consumers in the UK and beyond and Deko has an active interest in helping to shape its future regulation. BNPL is a term which has become widely used to describe a broad array of consumer credit offerings. The government, in their earlier consultations for regulating BNPL, focused on two particular types of credit products, which are currently exempt from regulation. Firstly: short-term, interest-free credit. In this case, the short term is defined as 12 months or less. The government has stated that this product is usually offered in-store, with consumers taking out a single, higher-value discreet agreement with the credit provider, who may be a third-party lender or the merchant. Secondly: BNPL. The government describes BNPL as usually taken out online, with consumers having an overarching relationship with a thirdparty lender, under which multiple low-value agreements are made, with little transactional friction. The key difference between the two is that the definition of BNPL encompasses repeat lending, whereas shortterm interest free is a single loan. The FCA has looked into repeat lending in the regulated credit sector through supervisory work in recent years, and some evidence of potential harm was observed. In the BNPL space, these risks of harm are amplified by virtue of the lack of credit reference reporting, individual affordability checks for each separate agreement taken out under the BNPL relationship and post-sale protections. Does being an ‘instant’, embedded, online credit product have any bearing on the likely regulations for BNPL? We expect a further consultation on the legislative changes from the government around mid-2023 and then for the FCA to consult on its approach to the new BNPL regulatory regime once the law has been finalised. It is because of our position in the market that I am sure we will continue to engage with these future consultations. BNPL products are designed to meet a specific consumer need and when used responsibly can be a beneficial solution to help customers spread the cost of purchases. We can see first-hand the difference this makes to consumers and merchants, small and large. For instance, Dekos’ BNPL product is designed to present all options, from short-term interest-free to longer-term interest-bearing loans, in a clear and simplified way that customers can understand sufficiently to make an informed choice. This presents a solid foundation in preparation for the incoming Consumer Duty and the future regulation of BNPL The government is consulting on open banking, which has seen low consumer take-up. Is there any connection between the thinking on how best to support open banking and how best to regulate BNPL? eg could the government require the use of open banking by anyone who wants to use BNPL? There is no doubt that the use of open banking could enhance the data available to lenders when undertaking their creditworthiness and affordability assessments. Considering that BNPL products are driven by innovative technology, it seems that the two would go hand-in-hand. However, I think this is a broader question and should not be limited just to BNPL. Open Banking could play a part in enhancing affordability assessments across the consumer lending market, giving lenders access to real-time information to verify income and expenditure without requiring customers to submit copies of payslips or bank statements, thus improving the customer experience. We are already seeing some fintech businesses offering open banking services specifically for affordability assessments. There are some barriers preventing this from happening in practice, and these barriers will need to be addressed if we are to see a high level of take-up. Partnering with open banking partners, or setting up and becoming licenced as a Payment Service Provider (PSP) will cost money, so firms will need to be comfortable accepting the costs involved to achieve the potential benefits. There are licensing considerations for firms. To access bank account data they may need to obtain a licence as an Account Information Service Provider (“AISP”), or partner with a company that is a licenced AISP.