Major companies buy now, pay later Clearpay, Klarna, Laybuy and Openpay have agreed to change “potentially unfair and unclear” terms and conditions after an intervention by the financial regulator.
The Financial Conduct Authority (FCA) said it was able to use consumer law to enforce the changes. However, the regulator acknowledged that it still lacked the necessary powers to regulate the sector to the same level as other consumer finance companies.
Firms have been forced to change contract terms on cancellations and continued payment authorization to make them “fairer and easier to understand”, the FCA said. Clearpay, Laybuy and Openpay have also agreed to refund some late payment fees they incorrectly charged after customers canceled orders.
The use of buy now, pay later (BNPL) has exploded in recent years, with an FCA review last year concluding that the size of the UK market had tripled in 2020 alone, even as other Short-term forms of consumer credit such as payday loans have declined after being forced to improve consumer protection. The market is worth around £6.4 billion a year in the UK, according to consultancy Bain & Company, and is used by around 10 million shoppers.
The government is considering introducing new rules for the sector, but has not yet specified what action it will take.
BNPL services are usually offered at the online point of sale, allowing buyers to pay in instalments. Unlike payday lenders or credit cards, BNPL lenders generally do not charge interest on loans, which means they avoid applicable regulations. Instead, retailers pay the business fees.
Rapid growth – and the prospect of lending platforms expanding to retailers around the world – has helped BNPL companies achieve huge valuations, typically enjoyed by Silicon Valley tech companies rather than credit lines. the consumption. Swedish company Klarna was valued at $45 billion in an investment round in June backed by SoftBank, the Japanese investment fund.
Stella Creasy, the Labor MP for Walthamstow, criticized the FCA’s ‘mole swoop’ approach to targeting BNPL businesses. She told the Guardian it was the latest example of “legal lending”, in which consumers are encouraged to make a habit of borrowing money they cannot afford to repay. It was an issue whether or not interest was charged to the consumer, she said.
“That’s why we urgently need regulation and it has to be regulation on the same level as the regulation that all other consumer credit companies have to follow,” said Creasy, who played a leading role in tighter regulation of payday lenders such as the collapsed Wonga. “These companies and the government promote the idea that this is a different industry and needs slightly different regulation.
“You can buy pizza by buy now, pay later. How is it different from borrowing with a credit card? »
Klarna and Laybuy said they support calls for direct regulation of the sector by the FCA rather than more general consumer laws.
Alex Marsh, the head of Klarna UK, argued that Klarna was “a fairer and more sustainable way for consumers to access credit” because it did not charge consumers fees or interest on loans. He said the company welcomed the FCA’s intervention and always made it clear that it offered a credit product.
Gary Rohloff, who co-founded Laybuy in New Zealand before listing its shares in Australia, said the company was “absolutely committed” to “fair and transparent” terms.
A Clearpay spokesperson said the FCA’s action affected a “very small group of customers who may have been wrongly charged late fees”, and added that it wanted to be “as transparent as possible”. .
An Openpay spokesperson said the company welcomes the FCA’s advice and supports “fair and proportionate regulation”.
Sheldon Mills, FCA’s Executive Director of Consumer and Competition, said: “Buy now, pay later has grown exponentially. We do not yet have the power to regulate these companies, but we do have the power to review the terms and conditions of consumer contracts for fairness, and have acted proactively to ensure the BNPL industry adopts standards high in their terms and conditions.
He added that he hoped the rest of the industry would follow the voluntary changes to the four companies’ terms.