There are five main areas for firms to consider in respect of the regulation of BNPL credit, these are :
- Credit broking;
- Financial promotions;
- Pre-contractual information (PCI);
- Credit agreements; and
- Creditworthiness and consumers in financial difficulty
Although the final rules and regulatory guidance for BNPL agreements are yet to be published, the FCA has used the Consumer Rights Act as the foundation for the BNPL regulation and to assess the current fairness and transparency for consumers.
Following its sample review, the Financial Conduct Authority (FCA) released two Press Releases on 14 February 2022 announcing subsequent decisions made by four major providers of BNPL products, to address potentially unfair and unclear contract terms and mitigate potential risk of harm to consumers.
Implications for Firms
The four firms involved have acted early to change their contract terms leading down a path of early adoption of planned FCA changes, which other participants are encouraged to follow.
Sheldon Mills, Executive Director of Consumers and Competition of the FCA, said “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”. The decision to voluntarily adopt the FCA’s conclusion signifies a clear commitment from some of the leading participants in the market to embrace the planned changes in regulation and importantly, it demonstrates a commitment from these firms to be early adopters in aligning themselves and their contacts with the FCA’s agenda in relation to its new Consumer Duty and overall strategy to deliver better consumer protection for consumers, where it is felt that there is currently the potential for consumer detriment.
The four areas where contract terms have been enhanced include:
1. New provisions for consumer cancelling contracts for purchases funded by a BNPL loan
In future, online consumers should have the equivalent option to exercise their statutory rights under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (CCRs) to cancel the online sales contract.
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 method they provide to consumers to pause or suspend payments, in situations where the consumer cancels or returns goods, as a contractual right.
2. New provisions enabling the firms to terminate and/or suspend a consumer’s account or access to services.
When drafting this type of term, firms should:
- Make it clear when providing an advance notice to consumers if they intend to terminate and/or suspend a consumer’s account to access to services.
- Explain the limited circumstances in which they might terminate and/or suspend a consumer’s account or access to services, without giving advance notice. These circumstances must be fair and reasonable i.e. 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.
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 money owed to them by the firm from instalments that they would have been expected to pay under the contract.
4. Continuous payment authority 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.
It is therefore, the responsibility of all firms who offer BNPL agreements or products to ensure that their consumer contracts comply with all consumer protection legislation applicable to their business, which will be reinforced and monitored through FCA regulation from July 2022.
As outlined above, this is one of a number of changes for all firms to be aware of if they offer BNPL credit to customers and will become subject to the scope of regulation in the future.
DWF can help. Our blended team of experts in regulation, consumer lending and legal contract terms can help you embrace and embed the changes to BNPL credit. We can also assist with preparing applications or variations of permissions for submission to the FCA.
Please contact us to discuss how these changes may affect your business and how we can help.
Written by Andrew Jacobs and Sharon Ugboaja