FCA to proceed with proposals to remedy perceived customer harms in the Buy Now Pay Later sector

26th June 2019

New rules in force from 12 September and 12 November 2019

BNPL proposals

In December 2018, the FCA consulted on a package of remedies relating to Buy Now Pay Later (BNPL) products with an aim to encourage more customers to repay, in full and in part, during the BNPL offer period. The remedies that the FCA proposed can be split into two categories:

• remedies designed to improve the information disclosed to consumers relating to BNPL products; and
• remedies relating to the structure of BNPL products and the charging of interest.

Following feedback from consumer groups and industry respondents, the FCA are proceeding with its proposed rules, with some tweaks as a result of the responses received. Under the new rules, firms will be required to provide additional information in the adequate explanation of BNPL products, provide prompts to consumers regarding the BNPL offer period and cease the practice of ‘backdating’ interest on amounts that the customer has repaid during the BNPL offer period.

The new rules

The new rules introduce some additional definitions to the FCA Handbook Glossary including BNPL agreement, BNPL credit and BNPL payment condition. These definitions have been modified slightly following feedback to ensure that they do not capture all forms of promotional interest-free or low interest periods, such as those which are common on catalogue or store card purchases.

The FCA received positive feedback on the proposed rules relating to disclosure and communication of information relating to BNPL products. 12 out of 13 respondents agreed with the proposals in this area (with the other respondent not expressing a view). As a result of this, amendments will be made to the relevant sections of the FCA Handbook Consumer Credit Sourcebook (CONC) to implement the following:

• CONC 3.3.11A G will be added which provides guidance to BNPL firms when issuing communications or financial promotions regarding BNPL products. The new guidance requires firms to present offers in a clear and balanced way, highlighting relevant risks in a prominent manner;
• CONC 4.2.15R (8) will be extended to cover BNPL products, obligating firms to provide customers with information regarding the limitations that apply to any zero percentage, low interest, introductory or other offer, including how interest will be charged if they fail to repay; and
• CONC 6.7.16A R will be extended to cover BNPL products, requiring firms to provide notice to customers of any action that needs to be taken to benefit from any zero-percentage or low interest, introductory or promotional offer in a clear and timely manner.
• Due to the positive feedback received, the FCA is maintaining its proposed implementation date of 12 September 2019 for the additional disclosure BNPL rules.

The feedback in relation to the ‘deferred’ or ‘backdated’ interest was more varied. The FCA did not accept the consumer groups’ view that firms should be banned from charging backdated interest on all amounts, including those not repaid by the end of the offer period, but they also did not accept firms’ feedback that the proposed remedy was disproportionate.

The FCA acknowledged that BNPL works for many consumers who find it a useful way of deferring payment and managing their budgets. The FCA also acknowledged that incurring interest is not inherently harmful, but continued to hold concerns relating to the complexity of BNPL products and the differential treatments of partial and full repayments.

The FCA recognised that the absence of daily interest being charged during the offer period will remove the financial incentive for customers to pay earlier during the offer period, but noted that the arguments put forward by the industry respondents were premised on customers having a fundamental understanding of the operation of daily interest accrual. Despite the move toward the provision of additional information, the FCA made it clear that they expect only small shifts in consumer behaviour as a result of this, and predict that the primary driver of benefits will be in structural changes to BNPL products.

As a result of this, the FCA was not swayed by firms’ feedback and is introducing the proposed new rules in CONC 6.7.16B which prevent firms from charging backdated interest on partial repayments made by consumers during the BNPL offer period. As a result, firms will be unable to charge any interest for amounts repaid within the BNPL offer period, irrespective of the point at which such sums are repaid during the period.

The FCA have accepted that the changes to the interest charging structure of BNPL products will necessitate substantial changes to core IT systems which will need to be planned, developed and tested. As a result, the partial repayment rules have been delayed and will come into force on 12 November 2019. The extension is designed to give the industry more time to implement the changes whilst benefitting customers shopping before Christmas.

Further considerations

The FCA considered feedback regarding the impact on the BNPL sector and wider economy, but did not consider these to be significant. The FCA had not seen strong evidence to support assertions that firms may withdraw from the BNPL market, and expected that market forces would lessen any significant price increases. Consumer access to credit was considered unlikely to be affected in any event as alternative forms would be available

Any impact on the wider economy was not considered to be a significant risk, as the underlying products concerned would still likely be purchased albeit potentially through alternative means if availability of BNPL products were to be limited as a result of the new rules.

The FCA will continue to monitor the market for any significant detrimental changes, and intervene where it considers appropriate.

If you require any further information on changes you will need to make to your BNPL products to comply with the new rules, please contact Jeanette Burgess.