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What has happened?

Early in 2022, the FCA reviewed the customer contracts of a small sample of Buy Now Pay Later (BNPL) firms and took action intended to make BNPL contract terms fairer and clearer for consumers.

What are the key points of the review?

The FCA does not currently regulate BNPL products, but the Government intends that it will do so in the future. Before that happens, all firms must comply with consumer protection legislation, which the FCA can enforce.

BNPL is a broad term and covers a variety of credit agreements, typically used to spread the cost of purchases. Not all BNPL products are regulated by the FCA under consumer credit regulation. Unregulated BNPL credit agreements rely on the exemption in Article 60F(2) of the Regulated Activities Order (RAO).

However, all BNPL firms must comply with consumer protection legislation, which the FCA has powers to enforce. This includes the Consumer Rights Act 2015 (CRA), for contracts entered into from 1 October 2015, and the Unfair Terms in Consumer Contracts Regulations 1999, for contracts entered into between 1 July 1995 and 30 September 2015.

Because the FCA had existing concerns about BNPL, it reviewed the terms and conditions in the contracts of four of the largest providers in the field, finding potential harm to consumers in the contracts of Clearpay, Klarna, Laybuy and Openpay. It was concerned that certain types of terms as set out below might not meet the fairness and/or transparency requirements of section 62 and/or section 68 of the CRA respectively.

Terms setting out what happens if a consumer cancels a contract for purchases funded by a BNPL loan.

The terms, as previously drafted, required consumers who returned goods to continue to pay instalments until the BNPL firm received confirmation from the retailer that the goods had been received and/or the BNPL firm had received the refund from the retailer.

Where consumers exercised their right to cancel the online sales contract, by returning all the goods forming the order, the loan agreement should have been terminated in accordance with regulation 38(1) of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (CCRs). The FCA was concerned that this may not always have happened. As a result, in some circumstances consumers may have either continued paying instalments where they did not need to or were charged late payment fees for not paying instalments after the loan agreement should have been terminated. This may have occurred due to a delay in the retailer informing the BNPL firm that the consumer had cancelled their online sales contract.

Firms that charge late payment fees should also review the circumstances in which they have previously charged these fees to consumers for not paying instalments after the loan agreement should have been terminated. The FCA expects firms to provide redress where they find they have charged these late payment fees inappropriately. Firms are expected to respond swiftly to any consumer who contacts them about late fees incurred in circumstances similar to those specified.

Consumers can exercise their statutory rights under the CCRs to cancel the online sales contract. They may also have a contractual right to cancel it. When drafting this type of term, all firms should:

• take into account the CCRs, in particular the cancellation provisions,
• clearly set out the timing and how they will process the refunds (fully and partially) when the consumer cancels and/or returns goods to the retailer, and
• consider including any facility they provide to consumers to pause or suspend payments, in situations where the consumer cancels or returns goods, as a contractual right.

Terms enabling firms to terminate and/or suspend a consumer’s account or access to services.

The FCA was concerned that the terms, as previously drafted, could be used to terminate and/or suspend a consumer’s account for any reason without notice and restrict or end the consumer’s access to their account in an unreasonable way and it considered this discretion to be too broad.

When drafting this type of term, all firms should:

• make it clear when they will provide advance notice to consumers if they intend to terminate and/or suspend a consumer’s account or access to services,
• explain the very limited circumstances when they might terminate and/or suspend a consumer’s account or access to services without giving advance notice, ensuring these circumstances are fair and reasonable (for example, due to suspicious activity), and
• make it clear to consumers what the consequences are if the firm terminates/suspends a consumer’s account and ensure those consequences are reasonable (this includes consumers not being subject to more onerous payment terms where the firm terminates the contract without any fault on the consumer’s part).

Right of set-off terms.

Where a consumer is owed money by a firm, then the consumer may have a right to set off that amount from payments they are due to pay to that firm. The FCA was concerned that the terms as previously drafted could be used by firms to exclude this right inappropriately.

Continuous payment authority terms.

A continuous payment authority (CPA) is created when a consumer gives a firm their debit or credit card number and consents to the firm regularly taking money from their account. The FCA was concerned that some of the firms’ terms did not make it clear how a consumer could cancel their CPA.

When drafting these terms, firms should make it clear how a consumer can cancel their continuous payment authority and what impact this has on any outstanding payments due.

The outcome of this review

As a result of this work, the firms reviewed agreed to change terms in their consumer contracts to make them fairer and easier for consumers to understand and to better reflect how they use them in practice. In response to the concerns raised, all four firms agreed to amend their terms to address the FCA’s concerns. Where relevant, this included changing their cancellation terms to better reflect how they are applied in practice and to better reflect the CCRs. Some firms have a facility to allow consumers to pause or suspend payments in these circumstances. These firms have also agreed to make this facility a contractual right, where it was not included already.

Some of the firms also offered to voluntarily refund consumers who had in the past been inappropriately charged fixed late payment fees for instalments that were stated to be due after they cancelled their entire online sales purchase with the retailer. This applies to Clearpay, Laybuy and Openpay.

How can we help you?

If you’d like to know more about how we can help you with your BNPL arrangements, or any other regulatory compliance issues, our specialist team is here to help.

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.