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What is happening?

Whether it’s liked, wanted or needed, BNPL regulation changes are incoming for the BNPL sector. HM Treasury closed its consultation on 6 January 2022 and it can be expected that regulation will be on its way for BNPL firms later this year.

Helpfully, the consultation gave a strong indication of what will be in scope of regulation for BNPL firms and what you need to start thinking of now to ensure you are ready ahead of BNPL regulation.

This blog serves as an initial guide for BNPL firms and what you can expect. The main considerations will be:

Undertaking a creditworthiness assessment of your consumers

Right now, you are not required to undertake a creditworthiness assessment of your consumers before they draw down BNPL credit. However, the government anticipates that regulation would include the application of the FCA’s current rules of creditworthiness, i.e., assessing affordability and subsequently an individual’s suitability to borrow. This will likely be one of the bigger changes that your business model will have to adapt to. Assessing affordability means looking at the financial standing of a customer before they take out the loan and deciding whether they are in fact able to afford that loan. In practice, there is a lot of modern technology out there that you can utilise in order to facilitate these assessments, coupled with intelligent and innovative algorithms doing a lot of the hard work. Most lenders will use one of the big three credit reference agencies and/or combined with Open Banking and we expect that BNPL firms may have to do this too. BNPL firms may also have to think about how the BNPL product is reported back to the credit reference agency. However, one key point to note is that whilst a lot of this can be outsourced, ultimately the firm will still be responsible for its lending and as with other credit lenders in the market, a credit underwriting specialist will be required to oversee the loan book. In short – you may want to start shopping around for a credit underwriting expert – someone with knowledge of underwriting, debt management post-drawdown and ensuring that the algorithm or outsourced technology is doing exactly what it says it should be doing.

Arrears, default and forbearance

Another hefty area that will require consideration is how you process late payments, those in arrears and defaults, collections and recoveries, as well as forbearance practices. You will require a detailed policy outlining how you will effectively manage these borrowers through the process. (Get in touch to take a look at our policy if you are struggling to find a starting place!) You will also have to start thinking about providing clarity to customers about any fees and charges related to the facilities and when you may pass a borrower onto a debt collection agency. The government has indicated that proportionate regulation of BPNL firms would include requirements about how to treat customers in financial difficulty. This means treating borrowers with forbearance when they may find themselves in financial difficulty, certainly before passing them onto any third-party agencies. This involves keeping an open dialogue with customers and exercising forbearance in the form of suspending, waiving, or cancelling charges, allowing and facilitating deferment of payments; or accepting token payments.

The report also highlighted potential regulation surrounding:

Financial promotions (i.e., your marketing)

The Advertising Standards Agency has already published guidance for BNPL firms and, under the consultation, HM Treasury is considering whether it could be strengthened by the application of the financial promotions regime. This would mean that the merchants you are partnered with may have to seek approval for any financial promotions in relation to your BNPL product. Whilst there are a number of ways in which this could be achieved, we need to wait and see what the response is on the back of the consultation to understand what these requirements may look like. However, in any respect, it may be worth weighing up whether you are better off studying the financial promotions regime as part of the BNPL regulation overhaul in advance of any such announcements.

Good to get an understanding of:

The report also detailed some areas that are good to get an understanding of but will require looking at in further detail once the final rules are in place to understand what exactly will be required:

• Pre-contractual information requirements – the government is thinking about applying FCA rules and disapplying section 55 of the CCA rules.
• Redress to the FOS – this would mean the borrower would become an eligible complainant and would have recourse to the Financial Ombudsman Service (FOS). The ability to identify and effectively manage a complaint properly would become paramount and an integral part of your customer service operations. The complaint rules aren’t as clear-cut as they sound and although not detailed in the report, would mean adhering to the rules set out in DISP of the FCA sourcebook.
• CCA requirement for consumers in financial difficulty – these are post contractual notification requirements at specified times that you may have to put in place if the government decides to include these as part of any proposed BNPL regulation.
• Form and content of the credit agreement – the government may introduce bespoke legislation here.
• Improper Execution – this may require the consumer to provide a ‘signature’ and you amending your customer journey to include this.
• Section 75 – this may require you to start offering your own buyer protection scheme.
• Retailers captured by credit broker legislation – this one doesn’t affect you directly; it could impact your borrower flow as essentially merchants and retailers may have to apply for legislation as a credit broker, although the government have indicated that this is unlikely given the regulatory burden it would impose.

BNPL FCA Authorisations – How do you get FCA authorised?

Alongside any changes referenced above, you’ll need to make an application to the FCA to become an authorised or registered (to be determined) BNPL credit firm.

Making an application to the FCA comes with its own set of rules and conditions. You’ll need to ask yourself the following questions before submitting:

1. Location of offices: is the firm and its senior management / decision making function based in the UK and, if there are overseas influences, how do this impact you?
2. Supervision: can you be effectively supervised by the FCA in order to meet its statutory obligations? You need to demonstrate how you can effectively meet and report your obligations, as well as communicating openly and competently with the FCA as and when required to do so both pre- and post-application.
3. Resources: can you demonstrate that you have appropriate resources in place to meet your regulatory obligations with the resources currently in place? These resources include both financial and non-financial resources.
4. Suitability: is the senior management team appropriately skilled and competent to effectively run the business, and is the management team of good professional, personal and financial standing in order to discharge your obligations under the regulatory regime?
5. Business model: have the business model, structure and your products been established with the customer in mind and are not going to impact or call into question the FCA’s statutory objectives?

• What documentation and information will likely be required for BNPL authorisation?
• What would the process look like?
• What does ‘ready, willing and organised’ actually mean?

We’ll look to provide some further guidance around these and other questions as part of our next blog on BNPL.

How we can help with BNPL regulation

Getting your documents and model in place for authorisation

We can help you get regulatory ready, threshold conditions ready and advise on structuring your business model ahead of upcoming regulation. We also have a suite of policies, procedures and templates that have been built upon the back of our extensive experience and knowledge based on direct FCA feedback and opinions and from working with a number of firms across the credit space.

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.