UK finance regulator effects changes to ‘buy now, pay later’ contract terms

The Financial Conduct Authority (FCA) has used its influence to secure changes to the contract terms of buy now, pay later (BNPL) firms, including refunding some customers who were unfairly charged.

The UK financial services regulator does not regulate the BNPL providers Clearpay, Klarna, Laybuy and Openpay, but used the Consumer Rights Act to asses them amid fears being raised for consumers.

The FCA was concerned there was a potential risk of harm to consumers because of the way some of the firms’ terms were drafted.

A review of the market carried out by the FCA found that the use of BNPL products nearly quadrupled to £2.7bn in 2020. The increased popularity of fintech, offering convenience and easier access to credit, is behind this huge rise.

BNLP firms have agreed with the regulator to make the terms on issues such as contract cancellations and continuous payment authorities fairer and easier to understand. Clearpay, Laybuy and Openpay have agreed to change the terms that involve late payment fees, which has resulted in them agreeing to voluntarily refund customers who have been charged late payment fees in specific circumstances. 

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 terms and conditions.

“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.”

Last month, consumer rights defender Which? called for stronger protection for consumers using BNPL products because fintech is accelerating and simplifying its take-up.

Which? interviewed 30 BNPL users, and was concerned that they did not fully understand the risks of choosing a “pay later” option at the checkout.

“Many of the BNPL users interviewed by Which? did not think of BNPL schemes as a form of credit, meaning they could unwittingly be exposing themselves to serious risks of missing repayments, such as late fees, marked credit reports or referral to a debt collector,” it said.

BNPL users interviewed referred to the scheme as a method of paying or a money management tool, rather than a form of credit. One said: “It allows payments to be spread out for budgeting. It made things possible which in one go would have been extremely difficult and I would have probably had to borrow money from elsewhere.”

The government plans to change the law to bring some of the current forms of unregulated BNPL firms under FCA regulation.