Has running-account credit come of age in the UK?

Consumer credit legislative reform is on the horizon, including the much-anticipated regulation of exempt "buy now, pay later" (BNPL) credit – and the expected changes are driving innovation in the use of running-account credit models.

Running-account versus fixed-sum credit

Running-account credit is the antithesis of the more widely used fixed-sum credit. At its most basic, running-account credit allows borrowers to spend up to a maximum limit, repay and then spend again – all under a single agreement.

Fixed-sum credit, by comparison, enables the borrower to draw down a fixed amount – usually, but not necessarily, in a single drawdown – and does not permit the reborrowing of sums repaid. New agreements are required for additional borrowing.

When funding repeat-purchase transactions, entering into separate fixed-sum credit agreements for each transaction comes with additional burdens for the lender. These might include undertaking creditworthiness and affordability assessments (which must be carried out and recorded before a new agreement is entered into), providing pre-contract information and signing a new agreement each time a new loan is made.

If the lender offers a running-account credit agreement, affordability checks must still be carried out beforehand in the same way; however, almost all of the burdens can be done away with for any subsequent spending on the account. Instead, a "business as usual" affordability monitoring process can be put in place to continue throughout the life of the agreement.

Evolving models

It is no wonder, then, that firms are exploring innovation using running-account models.

Historically, running-account credit was mostly confined to products, like credit cards and, later, store cards, where the credit and the account were both provided by the lender. As consumer credit innovation continues at pace, new business models are moving away from this structure to involve multiple parties providing constituent services for a single product, wrapped up in a seamless customer journey – for example, a payment or e-money account and payment card provided by one party and a credit line provided by another.

This is often because firms do not have all the regulatory permissions required to offer the entire product themselves (most commonly, permission to offer credit as well as permission to offer payment services). As firms become more sophisticated and ambitious in their product design, and embedded finance and point of sale products become more popular, it is important to remember how 'behind the scenes' changes to product structures can result in customers having very different protections. In other words, not all running-account products are equal, certainly from a legal and regulatory perspective, even if from a customer's perspective there is no discernible difference in terms of a product's look and feel.

Why does it matter?

Financial services legislation provides some very useful protections for customers who spend using certain types of running-account credit.

Depending on how the product is constructed, a customer may benefit from some, all or none of these protections, without even necessarily being aware of it.

Consumer protections: section 75 CCA

Section 75 of the Consumer Credit Act 1974 (CCA) is a relatively well-known and powerful consumer protection which applies to most, but not all, regulated running-account credit products.

In-scope running-account products are "borrower-lender-supplier" agreements which:

• finance a transaction between the borrower and a supplier, which is made by the lender under pre-existing arrangements (or in contemplation of future arrangements) between the lender and the supplier – credit cards fall in this category, with the "arrangements" being the card scheme rules; or
• are for "unrestricted use" credit (that is, the credit can be spent by the borrower without any restriction, even if that would breach the terms of the agreement), which is made by the lender under pre-existing arrangements between it and a supplier in the knowledge that the credit is to be used to finance a transaction between the borrower and the supplier.

It can to be tricky to work out whether the agreement is a borrower-lender-supplier agreement, and even more difficult to determine whether it falls within one of these two categories.

In addition to being an in-scope borrower-lender-supplier agreement, section 75 only applies where the goods or services being financed have a cash price of between £100 and £30,000. There is no requirement for the entire price to be paid using the credit.

Section 75 allows a customer to bring a claim against the lender in the event the supplier of the goods or services funded by the running-account credit is in breach of contract or has made a misrepresentation. Crucially, the lender's liability is not limited to the amount of credit provided.

Consumer protections: chargeback

Any purchase made using a credit card is subject to relevant card scheme rules. These govern the relationship between the lender (who is often, but not always, the card issuer) and the payment acquirer for the merchant (who supplies the goods or services purchased using the card).

A chargeback is a reversal of a card transaction which a customer can ask their card issuer to request if the goods or services have not been delivered. Importantly, it is a discretionary remedy rather than a right.

Once a customer makes a request, it is usually subject to an investigation and the payment acquirer recovering funds from the supplier if the claim is valid. To manage this risk, payments acquirers may hold back funds from merchants in case a chargeback liability arises.

Consumer protections: PSRs

The Payment Services Regulations 2017 (PSRs) provide protection to customers in the event that unauthorised transactions are made from a customer's "payment account", and where payment transactions are incorrectly executed or not executed at all.

The definition of a "payment account" is complex, and depends on the functionality of the account, and how it is marketed and sold by the provider. A standard credit card account which allows a customer to spend across multiple merchants would be a payment account. Running-account products which only permit funds to be paid to a single recipient (for example, into the customer's own bank account or to purchase e-money from a single supplier) are unlikely to be payments accounts subject to the PSRs.

Pulling it all together

As soon as a credit provider partners with an e-money provider (EMI) or a bank to provide payment services, another party is being "inserted" in between creditor and debtor. This could recharacterise the EMI as the "supplier" for section 75 purposes, which may mean that the customer loses his or her section 75 purchase protection. It could also move where chargeback liability for a purchase sits and alter how the customer's protections under the PSRs play out.

Osborne Clarke comment

As we are seeing interest in innovative running-account credit products grow, firms will need to tread carefully to navigate the complexities outlined. It will be important for any firm looking into these models to understand the implications of how a product is structured, and what this means for their business and customers.

As further details emerge around wider consumer credit reform and regulation of exempt BNPL credit in future, it will be interesting to see how these changes continue to impact the running-account credit market.

If you would like guidance around running-account models, please get in touch with one of our experts below.