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Buy now, pay later - the financial services issue for fashion
Encouraging consumers to buy means for some retailers and brands finding ways to enable them to pay. So, as the demand for “buy now, pay later” continues to rise, particularly amongst younger consumers, the industry must consider more sophisticated payment options, some of which will require brands and retailers to be regulated under the UK financial services regime.
Regulatory issues arise where customers are lent money in order to make in store or online purchases. Banks or financial services providers lending money to customers are likely to be “entering into regulated credit agreements as lenders” and will therefore need to be authorised by the UK Financial Conduct Authority (“FCA”). However, fashion retailers that facilitate such lending arrangements will also need to consider their regulatory obligations.
Regulation for retailers?
If a retailer introduces a customer to a third-party lender, the retailer is likely to be engaging in the FCA regulated activity of “credit broking”; for example:
- where the lender will pay the retailer and recover the cost from the customer in instalments; or
- where a retailer introduces a customer to a credit or store card provider.
A retailer must not carry on credit broking in the UK, by way of business, unless they are authorised by the FCA (or unless they are exempt, or an exclusion applies).
Breach of this rule has a number of severe consequences for retailers and their staff:
it is a criminal offence which, if successfully prosecuted, can be punishable by a fine or up to two years' imprisonment, or both. The regulator may also take various other disciplinary measures as it considers appropriate (for example, it may prevent that retailer from obtaining regulatory authorisation in the future). In addition, and perhaps more importantly, agreements entered into by retailers in breach of the rule may be unenforceable. This means that retailers may be unable to recover:
- any commissions, fees or any other sums due from any lender that the retailer has dealt with; and / or
- the actual price of the garment due from the consumer.
There are a small number of exemptions applicable in certain circumstances. But these are subject to strict regulatory requirements which retailers should fully understand before introducing customers to a lender. For example, some fashion retailers might be able to benefit from the “instalment credit exemption” if they only broker credit agreements that:
- are for a fixed amount; and
- are repayable by no more than 12 instalments within no more than 12 months; and
- finance the acquisition of specific goods or services; and
- do not contain any charges or interest (including administration charges or processing fees); and finally
- meet other applicable regulatory requirements.
What action is required?
In order to compete effectively in this new space, some fashion retailers may wish to apply for full FCA authorisation as credit broker. However, this process is onerous and time consuming and most fashion retailers (that do not engage in any other form of regulated activity) will be eligible to apply for a limited permission on the basis that their broking relates only to the goods sold in their store.
As obtaining this limited permission is still a reasonably rigorous process, some fashion retailers may, as an alternative, opt to become an appointed representative (“AR”) of an FCA authorised credit broker (their “Principal”). This “lighter” option will be attractive to some retailers as the process to become an AR is significantly faster and cheaper than the process to obtain even a limited FCA authorisation. However, this option is more restrictive as ARs must operate within the scope of their Principal’s permission and must allow their Principal access to staff, premises and records in order that their Principal can monitor their financial stability, competency and regulatory compliance.
But, given the severe consequences of breach, fashion retailers need to think carefully about their regulatory obligations (and the applicability of any exemptions) before entering into any agreements to arrange finance for customers.