BNPL Firms Change Terms Amid FCA Concerns

February 14, 2022
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Although regulations governing buy now, pay later (BNPL) are still in the making, the UK’s Financial Conduct Authority (FCA) has asked the largest providers to amend their “potentially” unfair contract terms and offered general guidance to firms operating in the sector.

Although regulations governing buy now, pay later (BNPL) are still in the making, the UK’s Financial Conduct Authority (FCA) has asked the largest providers to amend their “potentially” unfair contract terms and offered general guidance to firms operating in the sector.

The largest BNPL providers Klarna, Clearpay, Laybuy and Openpay have agreed to change certain parts of their terms and conditions after the UK regulator said it was concerned about “a potential risk of harm to consumers", as a result of the way some of these documents were drafted.

Most examples of the product, which is often perceived as a new form of credit, are currently exempt from the UK’s consumer credit lending regulations due to the fact that it does not charge interest or fees, and is repayable in less than 12 months.

As the adoption of BNPL has surged significantly in recent years, the government announced in February that it will legislate to bring these products under the scope of the FCA.

Even though the type of BNPL products that Klarna, Clearpay, Laybuy and Openpay offer are not yet regulated, the FCA used the Consumer Rights Act to assess the fairness and transparency of the terms.

“Buy-Now Pay-Later has grown exponentially,” Sheldon Mills, executive director of consumers and competition at the FCA, said.

“We do not yet have powers to regulate these firms, but we do have powers to review the terms and conditions of consumer contracts for fairness, and have acted proactively to ensure that the BNPL industry adopts high standards in their terms and conditions,” he added.

The Consumer Rights Act 2015 (CRA), and prior to this the Unfair Terms in Consumer Contracts Regulations 1999, places fairness and transparency requirements on firms offering products or services to consumers.

For instance, the CRA establishes that an unfair term is not binding on the consumer and, if a term could have different meanings, the meaning that is most favourable to the consumer is to prevail.

In addition, the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (CCRs) could have relevance in certain BNPL contracts. The regulations state that if a consumer cancels a “distance or off-premises contract”, any “ancillary contracts” are automatically terminated.

FCA director of consumer and retail policy Nisha Arora warned last year that “we’re certainly not sitting back and waiting. We are using existing powers to protect buy-now-pay-later users — for example, scrutinising marketing materials and the way these products are promoted.”

The four firms have now voluntarily agreed to amend their terms relating to contract cancellations and make continuous payment authorities fairer and easier to understand.

Clearpay, Laybuy and Openpay additionally agreed to voluntarily refund customers who have been charged late payment fees in specific circumstances.

“The four BNPL firms we have worked with have all voluntarily agreed to change their approach. We welcome this and hope that the rest of the industry will now follow,” Mills said.

Calls for tighter credit card rules

As the FCA looks to address terms and conditions of BNPL providers, Fairer Finance and Klarna have come out fighting and called on the regulator to ensure traditional credit card providers offer more transparency.

Research commissioned by Klarna and Fairer Finance found that six out of ten credit card users do not know how much interest they are charged, raising concerns about how well the Consumer Credit Act and the FCA regulations work regarding credit card products.

“[N]ot a single respondent was able to correctly calculate how much a typical credit card purchase would cost after interest is taken into account. This is despite credit card companies following strict disclosure rules laid out in the FCA’s rulebook and despite being regulated,” the company said in the announcement.

“The Consumer Credit Act and FCA regulations need to be urgently reviewed and replaced with more effective rules that ensure customers are given the information they need, at the right time, and in a format and language that they can understand,” James Daley, managing director of Fairer Finance, commented.

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