New bill to regulate "buy now pay later" credits

New consultation draft bill will result in "buy now pay later" credits - until now unregulated in Denmark - being subject to the same regulation as traditional consumer credit products from 1 January 2023.

Prompted by,inter alia, media attention regarding over-indebted consumers, particularly the Danish Minister of Industry, Business and Financial Affairs has for a while had his focus on so-called "buy now pay later" credits ("BNPL credits"). These products are not subject to the Act on Consumer Loan Undertakings (lov om forbrugslånsvirksomheder) or the Credit Contracts Act (kreditaftaleloven) as they are interest-free, and no establishment or similar fees are payable. On the other hand, a payment default will often trigger significant fees and/or default interest.

On 30 June 2022, the Danish Financial Supervisory Authority (the "FSA") published a consultation regarding a draft amendment bill (the "Consultation Draft"). If the Consultation Draft is adopted by the Danish Parliament in its current form, it will end the current unregulated status of BNPL credits under Danish law.

Following amendments to the Act on Consumer Loan Undertakings and the Credit Contracts Act in 2020, many of the consumer credit providers in the Danish market pivoted to unregulated BNPL credits and for these providers, the Consultation Draft will result in very significant changes to the regulatory framework applicable to their business in general and their BNPL products in particular.

Below, Plesner's experts in consumer credit regulation discuss the content of the Consultation Draft and its potential consequences.

Amendments to the act on consumer loan undertakings

Today, § 1(3)(1) of the Act on Consumer Loan Undertakings exempts BNPL credits from the scope of that Act. This means that such products and their providers are today exempt from, among others, the requirement for a license from the FSA, requirements for prudent business practices, creditworthiness assessment, identification of target customer segments, annual percentage rate cap and the costs cap. 

If the Consultation Draft is adopted, this exemption will be significantly limited to cover only contracts meeting all of the following requirements:

(v) the contract is for the purchase of goods or services;
(vi) it is the commercial vendor of the goods or services offering a deferral of payment of the purchase price;
(vii) there is no third-party involved offering credit; and
(viii) the deferral period does not exceed 90 days after the date of the contract.

Since the provider of a BNPL credit will almost always be someone other than the vendor of the goods or services financed by the credit, only very few BNPL credits can be expected to meet requirements (ii) and (iii) above. Consequently, it must be expect that the significant majority of BNPL credits in the Danish market will henceforth be fully subject to the Act on Consumer Loan Undertakings whether the period of credit is shorter or longer than 90 days.

The consequences of the limitation of the exemption for BNPL credits will depend on whether the provider is already a financial business (as defined in the Danish Act on Financial Businesses) (or a real estate credit undertaking (ejendomskreditselskab)) or not.

For financial businesses and real estate credit undertakings, adoption of the Consultation Draft will mean that such providers will, in respect of their BNPL credits, also become subject to (i) the requirement to conduct creditworthiness assessments, (ii) the annual percentage rate cap, (iii) the costs cap, and (iv) the conversion right, in the Act on Consumer Loan Undertakings.

For providers who are not already financial businesses or real estate credit undertakings, the Consultation Draft will make them subject to the entirety of the Act on Consumer Loan Undertakings. In addition to the parts of that Act mentioned above, these providers will consequently also become subject to the Act's provisions on e.g. (i) requirement for a license (including Fit & Proper assessment of management), (ii) compliance with rules of good business practice, (iii) requirement to adopt procedures for identifying target customer segments, and (iv) more generally the Act's provisions on the FSA's supervisory activities.

Furthermore, the Consultation Draft proposes to create a new exemption from the Act for "debit cards" with up to 40 days' cost- and interest-free credit after each transaction (this exemption is consequently really directed at what would usually be labelled credit cards, not debit cards which are typically characterised by there not being any credit associated with the card and hence that transactions are settled to the user's bank account promptly after the card-transaction). This exemption is partially required since issuers of such "debit cards" are third-parties and would therefore otherwise become subject to the Act on Consumer Loan Undertakings once the Consultation Draft's recasting of the exemption in § 1(3)(1) enters into force.

Amendments to the credit contracts act

In the same way as the Act on Consumer Loan Undertakings, § 3(1)(1) of the Credit Contracts Act today exempts BNPL credits from the scope of that Act except for its § 8 c on so-called "short-term consumer loans". Today, BNPL credits are thus exempt from e.g. the Act's contractual and pre-contractual disclosure requirements and creditworthiness assessment just as users of BNPL credits do not have the rights that follow from the Credit Contracts Act including e.g. the right of withdrawal and of prepayment.

If the Consultation Draft is adopted, the exemption in § 3(1)(1) will be amended in the same way as the corresponding exemption in the Act on Consumer Loan Undertakings meaning that almost all BNPL credits must be expected to become fully subject to the Credit Contracts Act. In that case, BNPL credits will henceforth be required to comply with the Credit Contracts Act's provisions in, inter alia, disclosure requirements and users will have the rights that follow from that Act. In addition, providers of such BNPL credits will e.g. be required to conduct creditworthiness assessments and will be subject to the full range of the FSA's supervisory sanctions in the event of non-compliance with the Credit Contracts Act.

The Consultation Draft also proposes that an exemption for "debit cards" (corresponding to that proposed to be included in the Act on Consumer Loan Undertakings) be inserted in § 3(1)(2) of the Credit Contracts Act, but with the addition that § 8 b(2) of the Credit Contracts Act would still apply to such "debit cards". This would mean that although a "debit card" with a maximum credit of 40 days is generally exempt from the Credit Contracts Act, the issuer is still required to provide the user with the information listed in § 8 b(2) (inter alia concerning the amount of overdraft and interest rate) in the event of a "significant overdraft for more than 1 month" (unofficial translation).

Consequences for all businesses

Although the Consultation Draft is clearly targeted at providers of BNPL credits, all businesses should be alert to a possible - and possibly unintended - consequence of the limited exemptions in the Consultation Draft. Both the proposed amendments to the exemption in § 1(3)(1) in the Act on Consumer Loan Undertakings and the corresponding in § 3(1)(1) of the Credit Contracts Act thus exempt deferral with payment of the purchase price offered by the vendor of goods or services provided that the deferral period does not exceed 90 days after the date of the contract.

The opposite conclusion is that if a business offers a consumer a payment date which is more than 90 days after the date of the contract, this could potentially be considered as a credit subject to the Act on Consumer Loan Undertakings and the Credit Contracts Act regardless that the deferral might be costs- and interest-free. If this is the correct interpretation of the Consultation Draft, it is a significant development since customary non-interest-bearing deferral with payment of a purchase price provided by the vendor of goods or services has not previously been considered as "credit" under Danish law regardless of the duration of the deferral period.

Payment periods in excess of 90 days are probably a rare occurrence in consumer-relationships but one example might be larger construction works (e.g. construction or renovation of a house). In that connection, it is unfortunate that the Consultation Draft measures the 90-day period from the date of the contract which may, for instance in connection with construction projects, be months (or even years) before a given invoice from the contractor is payable. In this regard it would be preferable if the 90-day period were measured from the vesting time for the vendor's consideration, i.e. the time when the vendor has actually supplied its goods/services (e.g. reached a certain stage of a construction project) and is consequently entitled to invoice (part of) its consideration.

Adoption, entry into force and transition period

Pursuant to the Consultation Draft, the amendments are scheduled to enter into force on 1 January 2023 which necessitates that the amendment bill be put before Parliament October/November 2022.

The amendments will apply to credit contracts entered into after the entry into force of the amendment bill which means that credit contracts entered into prior to 1 January 2023 will not be subject to the new amendments.

For providers who will become subject to the requirement for a license under § 3 of the Act on Consumer Loan Undertakings, the Consultation Draft contains a transition rule which sets the deadline at 1 July 2023 for already active providers of BNPL credits to apply for a license and which permits such providers to continue offering such products during the FSA's processing of the license application.

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