Developments in technology and the financial services industry have, in recent years, promoted drastic shifts in consumer behaviors. These changes were especially visible throughout the COVID-19 pandemic, during which retail e-commerce sales reached record levels. Accompanying this shift in consumer behavior has been the proliferation of point-of-sale (“POS”) financing and buy now pay later (“BNPL”) plans.
This short article will identify key features of POS and BNPL plans and the current regulatory environment for such financial solutions.
What are POS financing plans and BNPL plans?
POS financing is a lending option that allows consumers to make incremental payments for larger purchases at the point of purchase. The eligibility requirements for such lending options are generally less stringent than those required for traditional secured loans. POS financing has traditionally been offered through installment loans including credit checks and an in-store application processes. Upon a review of the customer’s creditworthiness, the loan is issued and the merchant receives the funds from the financing provider. The customer agrees to the repayment plan, which is typically structured as installment payments.
Closely related to POS financing are BNPL plans, which enable consumers to finance a purchase with credit and spread out payments into smaller installments. BNPL services are usually accessed online and are used to purchase a broader range of products compared to traditional POS lending. POS financing and BNPL plans provide retailers and consumers with a number of advantages, including customer convenience, increased retail conversion rates and an expanded consumer base. Despite their advantages, both financing options come with regulatory and legislative requirements of which market participants should be aware.
The regulatory environment of POS financing and BNPL plans in Canada
The Canadian regulatory landscape pertaining to POS and BNPL financing is fragmented, with no single regulatory authority being solely responsible for the space. This differs from other jurisdictions such as the United States, where retail installment sales agreements are regulated in nearly every state.
By contrast, the Canadian framework stems from a combination of general banking, consumer protection and privacy legislation and regulations applicable to businesses operating in the space. Some of the key applicable legislations and regulations are outlined below.
Banking and other regulations regarding financial services
POS financing and BNPL may draw the application of the federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”). Specifically, the PCMLTFA stipulates that persons and entities providing “invoice payment services”, which are characterized as those acting as an intermediary between a payer and a payee to make payments to invoices, are engaged in the business of remitting/transmitting funds. Entities that engage in such practices that also have a place of business in Canada are characterized as a money services business (“MSB”). MSBs are subject to certain requirements including: record keeping and identity verification obligations, reporting suspected instances of money laundering and registration as an MSB with the relevant authorities.
Additionally, certain provinces such as Nova Scotia and Saskatchewan require that lenders or sellers obtain permits to enable them to extend credit to consumers. Furthermore, lenders may also be required to obtain an extra-provincial license in each province in which it is considered to be carrying on business under that province’s corporate law.
Consumer protection legislation
Provincial consumer protection legislation also contributes to the regulatory regime. The Ontario statute, the Consumer Protection Act, 2002 (Ontario) (“OCPA”) currently contains various disclosure requirements for all lenders (including those offering alternative financial services). A company engaged in the business of POS financing would likely be captured by the OCPA’s definition of “lender” as a supplier who is or may become party to a credit agreement and who extends credit or lends or may lend money to a borrower.
The OCPA prohibits lenders from laying certain charges against borrowers and requires the lender to clearly state the interest that will be charged for deferred payments. The OCPA also requires ongoing disclosure of prescribed information to consumers and to ensure credit agreements are not misrepresented. Generally, the OCPA requires all businesses to refrain from making unfair representations to consumers. This should be taken into consideration when deciding how a business will advertise or display its POS or BNPL plans.
Privacy legislation
In providing POS financing or BNPL plans to consumers, retailers and/or lenders may be collecting consumers’ personal information, which would draw the application of privacy statutes. The federal Personal Information Protection and Electronic Documents Act (“PIPEDA”) is an important source of privacy legislation that businesses operating in this space should be ware of. Among other obligations, PIPEDA imposes requirements for obtaining consent from consumers prior to the collection of their personal information. Compliance with PIPEDA’s consent requirements is mandatory – noncompliance may lead to complaints, court orders or damage awards. Additional requirements to inform the Privacy Commissioner of harmful security breaches also exist.
Future outlook for the regulatory environment
Regulators are becoming aware of the increased prevalence of BNPL plans and POS financing and have been turning their attention to the space. Indeed, BNPL plans were the subject of a Financial Consumer Agency of Canada (“FCAC”) Pilot Study published in 2021. The Pilot Study found there were risks in BNPL plans meriting further exploration, such as over-borrowing, over-indebtedness and the impact of BNPL services on users’ credit scores. The FCAC indicated that it would continue to monitor the BNPL market to better understand consumer behavior.
We will continue to examine the development of a framework for the regulation of BNPL plans and POS financing in Canada. We shall see if a comprehensive or streamlined system of rules and regulations develops to replace the patchwork of relevant laws found under banking, consumer protection and privacy regimes in Canada.
Should you have any questions or concerns regarding the regulation of Point of Sale financing or Buy-Now-Pay-Later plans, please contact a member of Miller Thomson’s Structured Finance and Securitization Group.
