Across the world the shifts towards online shopping and digital financial services has seen the rapid growth of the 'buy now, pay later' sector. The market in Ireland is largely untapped but that looks set to change with a number of new entrants expected and international players such as Klarna, Scalpay and Flexi-fi forecasting strong growth for the sector.
To date the sector has been largely outside the scope of Irish financial regulation. This briefing looks at draft legislation that will change that position and require buy now, pay later (BNPL) providers to obtain authorisation from the Central Bank of Ireland (CBI) and to comply with various consumer protection regulations.
How BNPL works
BNPL providers offer consumers the opportunity to purchase products/services and to defer payment in full until a later date. The payment process is usually structured as a part payment at the point of sale (online or in-store) with further payments to complete the purchase at a specified date in the future, usually within a few months.
Typically, this deferred payment option is interest-free provided the consumer upholds the terms of the payment arrangement. BNPL was originally confined to large purchases such as furniture and expensive electronics. More recently however, it has been extended to the purchase of a wide range of retail goods and services with purchase prices as low as ?20.
Currently unregulated in Ireland
BNPL providers will generally escape supervision and regulation by the CBI under the current rules. This is because the interest-free deferred payment structure falls outside the definition of "credit" set out in the Central Bank Act 1997 (the 1997 Act).
This means BNPL providers are not required to conduct background checks and suitability assessments on customers and they are not required to abide by consumer protection regulation and codes.
Another consequence of the current regime is that arrears accrued by BNPL customers will not impact on the customer's credit rating.
The current regime allows BNPL payment options to be quick, easy and available to all consumers, regardless of credit history. At the same time the sector is more vulnerable to fraud and does not offer consumers the same protections as those available to users of traditional credit services.
Changes on the way
On 23 June 2021, the Minister for Finance published the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 (the Bill). The Bill, if enacted in its current form, will bring the BNPL sector squarely within the scope of Irish financial regulation.
Definitions of 'Credit' and 'Retail Credit Firm'
The Bill extends the definition of "credit" in the 1997 Act to include BNPL arrangements and other hire-purchase/personal contract plan providers by including within the definition "deferred payments" and "other similar financial accommodation" alongside cash loans. It also extends the definition of "retail credit firms" to cover businesses providing direct or indirect credit.
These extended definitions will bring all BNPL providers within the scope of the regulatory regime for Retail Credit Firms, even those that provide credit indirectly via retailers. Retail Credit Firms are regulated entities, required to be authorised by the CBI. They are subject to a range of business requirements, including the Consumer Protection Code 2012, the Minimum Competency Code, anti-money laundering legislation, and fitness and probity standards.
CBI Authorisation Process
Retail Credit Firms are required to make an application for authorisation to the CBI. Applicants must demonstrate that they are able to meet the applicable authorisation requirements and standards, including in relation to governance and management, staffing, credit policy, IT systems, outsourcing and ownership. Capital adequacy requirements do not currently apply to Retail Credit Firms.
As part of the formal application, the applicant must prepare the following documents along with supplementary material:
- a completed CBI application form;
- a detailed business plan; and
- a detailed programme of operations.
The Bill contains transitionary provisions which allow existing BNPL firms to avail of a temporary authorisation. The transitional provisions will apply where the existing firm applies for authorisation as a Retail Credit Firm within three months of the enactment of the Bill. The temporary authorisation will remain in place until the CBI determines to grant or refuse the firm's application for authorisation.
Unregulated firms carrying on BNPL should consider the terms of the Bill and start preparing their applications for CBI authorisation. Firms will have only three months from the coming into operation of the legislation within which to make their formal application to the CBI.
The text of the Bill can be accessed here and it is expected to be enacted later this year.
Operators in this sector should also have regard to the European Commission's recently published proposal for a revised Directive on consumer credit (available here). The revised Directive will remove the current exemptions for interest-free credit and credit for amounts less than ?200. BNPL providers will therefore be required to comply with a range of consumer credit requirements, including standardised pre-contractual information, information to be included in credit agreements, fee limits and transparency, cooling off periods, etc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.