This statement summarises the changes made by four BNPL firms to their contract terms and contains guidance for firms in this sector more generally.
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 found in Article 60F(2) of the Regulated Activities Order (RAO).
However, all 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.
In recent years, more consumers have used BNPL products, particularly for online purchases. The Government[1] intends for these products to be regulated by the FCA in future. Ahead of this, we have used the CRA to assess the fairness and transparency of the terms of four firms offering unregulated BNPL products.
We identified potential harm to consumers and contacted the four firms with our concerns. This is in line with our strategy to act as an assertive regulator, by being proactive at the boundaries of the FCA perimeter where appropriate, and has resulted in good outcomes for consumers in this sector.
Changes the firms have made
The four firms involved, Clearpay, Klarna, Laybuy and Openpay, have fully cooperated with our work. We welcome their cooperation and their actions to address our concerns.
As a result of this work, the firms have agreed to change terms in their consumer contracts to make them fairer, easier for consumers to understand and to better reflect how they use them in practice.
With regard to one or more of the firms, we were concerned that the types of terms set out below might not meet the fairness and/or transparency requirements of section 62 and/or section 68 of the CRA respectively (although, ultimately, only a court can determine a term’s fairness and/or transparency).
We were concerned with the risk of harm to consumers as a result of the way the following types of terms were drafted:
1. Terms setting out what happens if a consumer cancels the 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). We were concerned that this may not have always 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.
2. Terms enabling the firms to terminate and/or suspend a consumer’s account or access to services.
We were 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. We considered this discretion to be too broad.
3. Right of set-off terms.
Where a consumer is owed money by a firm then the consumer may have a right to set off (deduct) that amount from payments they are due to pay to that firm. We were concerned that the terms as previously drafted could be used by firms to exclude this right inappropriately.
4. 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. We were concerned that some of the firms’ terms did not make it clear how a consumer could cancel their CPA.
In response to the concerns raised, all four firms have agreed to amend their terms to address our concerns. Where relevant, this includes 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 wasn’t included already.
As well as changes to their terms, some of the firms have offered to voluntarily refund consumers who have 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. Klarna does not charge late payment fees, so no such refunds are due to consumers. Where a consumer has returned some but not all of the goods that made up the order, no refund of the fixed late payment fees will be made.
Other than this, we did not see evidence of actual harm from how the firms applied the terms in practice.
Guidance for firms
It is the responsibility of all firms, including those in this sector, to ensure that their consumer contracts comply with all requirements of consumer protection legislation that apply to their business. In particular, firms should ensure that their contract terms:
- Comply with the fairness and transparency requirements of the Consumer Rights Act 2015 (CRA), and with corresponding requirements under the Unfair Terms in Consumer Contracts Regulations 1999 for contracts entered into between 1 July 1995 and 30 September 2015. Firms should note that an unfair term is not binding on the consumer under section 62(1) of the CRA. Additionally, if a term could have different meanings, the meaning that is most favourable to the consumer is to prevail under section 69(1) of the CRA. We draw firms’ attention to our webpages on unfair contract terms[2] which contain various materials to help firms in considering the fairness and transparency of their consumer contracts.
- Where applicable, take into account regulation 38(1) of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (CCRs), which states that ‘If a consumer withdraws an offer to enter into a distance or off-premises contract, or cancels such a contract under regulation 29(1), any ancillary contracts are automatically terminated…’
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. We expect firms to provide redress where they find they have charged these late payment fees inappropriately. Firms should respond swiftly to any consumer who contacts them about late fees incurred in circumstances similar to those specified.
On the four specific types of terms we have identified, matters which firms should consider when reviewing their existing contract terms and when they draft new ones include:
1. Terms setting out what happens if a consumer cancels the contract for purchases funded by the BNPL loan.
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
- 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
2. Terms enabling firms to terminate and/or suspend a consumer’s account or access to services.
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)
- make it clear to consumers what the consequences are if they terminate/suspend 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)
3. Right of set-off terms.
When drafting this type of term, firms should not prevent the consumer, who has such a right, from being able to offset/deduct money owed to them by the firm from instalments.
4. Continuous payment authority terms.
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.