FCA take action over BNPL small print 

The Financial Conduct Authority (FCA) has taken action against PayPal and QVC after finding potentially unfair and unclear small print in their buy now, pay later (BNPL) contracts. The FCA expressed concern over the impact on customers and prompted the two companies to change their terms. PayPal and QVC voluntarily made their terms easier to understand and clearer regarding cancellations and continuous payment authority.

BNPL has seen a surge in popularity in the UK, with 27% of adults using it in the six months to January 2023 – up from 17% in the 12 months to May 2022. It is noted that frequent users of BNPL are more likely to be in financial difficulty. While the FCA does not officially regulate the sector, it has the power to intervene and secure changes to contract terms.

The new data reveals that customers who have used BNPL over ten times in the past year were over four times as likely to have missed a payment of a bill or credit commitment in three of the last six months.

The data, which is part of the FCA’s Financial Lives research, shows that 27% of UK adults (approximately 14 million) have used BNPL at least once in the six months prior to January 2023. This is up from 17% who said they had used it in the preceding 12 months in May 2022.

The research also found that frequent users of BNPL are more likely to be in financial difficulty. Consumers who have used BNPL more than 10 times in the last 12 months were: over twice as likely as those who have not used BNPL to also have a high-cost credit product (48% vs. 22%) and were almost twice as likely to have increased the amount of debt on credit products over the last year (51% vs. 27%). BNPL customers were also over four times as likely to have missed a payment of a bill or credit commitment in three of the last six months (27% vs. 6%).

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said “Our research shows a significant increase in the use of BNPL over the past year. When used appropriately, the product provides valuable benefits, but we want to ensure that consumers, particularly those in vulnerable circumstances, have adequate protections and are given sufficient information.”

While the FCA does not have regulatory oversight over BNPL products, it is determined to protect consumers using financial services where it can.  The FCA has used its powers under the Consumer Rights Act 2015 to secure changes to potentially unfair and unclear contract terms in this sector, building on the FCA’s work with other BNPL providers last year and the guidance that was issued at the time.

Richard Lane, Director of External Affairs at StepChange Debt Charity, said “Given the immense financial strain so many people have been under for the past two years, it’s no surprise to see the use of BNPL on the rise. While we know that these products work well for millions of consumers, for those who are struggling to make ends meet it is an unregulated line of credit which can all too easily result in people borrowing to pay bills or make other repayments.”

“It’s encouraging to see that the FCA has secured changes to potentially unfair and unclear BNPL contract terms, as we have long-held concerns that current policies vary significantly between providers.”

“However, only proportionate regulation will improve these products for millions of customers, which is why we’ve been disappointed to see delays to the implementation of new rules that have been promised since 2019. We urge the Government to stick to its guns and bring about this regulation as soon as possible. Putting struggling consumers first is the right thing to do.”

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “As Buy Now Pay Later spreads its tendrils into the finances of 14 million people, it feels like a flourishing business, helping us spread the cost of purchases and manage our finances sensibly. However, there’s a much darker side to it. Very regular users run a risk that it could take a stranglehold on their finances, squeezing the life out of our financial resilience.”

“On paper, the fact there’s no interest to pay on money borrowed this way makes it a very sensible option to help us manage our budgets. There’s no doubt that millions of people are taking advantage of BNPL in a way that works for them. However, for others it becomes a dangerous habit – encouraging them to buy things they don’t really need and can’t afford. As a result, those who lean heavily on BNPL are far more likely to stray into other worrying types of borrowing – from taking out high-cost credit to letting debts mount up, and missing repayments.”

“The FCA has used its powers under the Consumer Rights Act 2015 to help bring changes to potentially unfair and unclear contract terms, addressing thorny issues like continuous payment authority terms easier and your cancellation rights.”ntinuous payment authority terms easier to understand – and PayPal has made terms relating to what happens when a consumer cancels the purchase funded by the loan clearer and fairer.

The FCA reminds all firms to ensure that their consumer contracts comply with all requirements of consumer protection legislation that apply to their business.

Conor D’Arcy, Interim Chief Executive of the Money and Mental Health Policy Institute, said “For some of us, Buy Now Pay Later can be a convenient and useful option. But this new research is more worrying evidence that people are using it when they are struggling financially and might find it difficult to understand the full implications of using this product. This risks sucking people further into a spiral of debt and compounding distress during the cost of living crisis.”

“It’s vital that the government acts quickly to put in place proper regulation of Buy Now Pay Later, so that people know what their rights are and where they can turn to if something goes wrong.”

Alastair Douglas from TotallyMoney said “With 14 million customers, the Buy Now Pay Later boom can in part be attributed to the credit vacuum created by banks who are tightening up and exercising greater lending caution. In the past year alone, almost 3 million low-income households had a loan application declined, while the cost of borrowing has soared for those who are accepted.”

“BNPL offers customers easy access to quick credit — and its users are more likely to be holding high cost products, are more likely to owe more money than they did a year ago, and are more likely to have missed a bill or credit payment in the last six months.”

“Inflation is still high, and one in three adults would struggle to cover an unexpected bill of £100. Nine million households are going into winter without any energy credit, and 2.6 million low income households have turned to high cost or illegal money lenders. And without adequate government support and tighter regulation, things are only going to get harder.”

Jackie Spencer, Head of Money and Pensions Policy at the Money and Pensions Service, said “The use of Buy Now, Pay Later is rising and it can be a useful product, but it’s designed for short term borrowing and needs to be used that way. Some people also take it when they hadn’t intended to and spend more than they’d originally planned because it was available.”

“Like any credit product, it’s vital that you can afford the repayments, have a clear plan to pay it off and don’t take out more than you can manage. If you’re struggling with Buy Now, Pay Later, or any credit repayments, our free MoneyHelper service can provide the tools and resources you need to find help.”