Buy Now Pay Later (BNPL) credit offers provide consumers a promotional period, typically up to 12 months, during which they may not be required to make repayments on a product purchased.
Generally, if the consumer repays the entire amount within this period, no interest is charged. However, if the consumer does not repay the entire amount, then interest is charged on the original credit amount or the unpaid part of that amount from the date of purchase.
The FCA has found that around 50% of consumers fail to repay the full amount within the initial offer period and is, therefore, working to address the issues and harm that can result.
In December 2018, the FCA published Consultation Paper 18 / 43, opening up responses to a set of BNPL measures set to affect catalogue credit and store cards. The FCA’s measures were proposed with the aim of protecting customers from the potential sources of customer harm identified in the BNPL market. These issues included:
- A lack of adequate explanations, advertising and other forms of customer communication
- Some consumers (including those in vulnerable circumstances) are using BNPL credit offers unsuitable to their needs or using it in an unsuitable way
- The backdating of interest after the offer expires sometimes does not take partial repayments into account
- Notice of when the BNPL offer period ends is not always given
CP 18 / 43 also proposed three disclosure remedies designed to improve the information consumers receive about BNPL offers and a new rule to prevent firms charging backdated interest on money already repaid by consumers during the offer period.
In June 2019, the FCA released Policy Statement 19 / 17, summarising the feedback received on CP 18 / 43 and providing final rules to be implemented in this market. The FCA has confirmed it will go ahead with the proposals from CP 18 / 43, subject to some small technical changes to the definition of BNPL credit. They will also extend the implementation period of the “backdating of interest” remedy by two months.
The implementation of these final rules will be staggered as follows:
- The disclosure rules and guidance will come into effect on the 12th September 2019
- The rule preventing backdated interest from being charged on repaid amounts will come into effect on the 12th November 2019
The FCA will measure the success of the changes made in the BNPL market by gathering and assessing information from firms. The information assessed may include the following:
- Whether the quality of information provided to consumers is improving
- The impact of the changes on consumers’ repayment patterns
- Whether firms are altering the structure or pricing of these products
- Whether there is evidence of firms withdrawing from the market
Considerations for firms
The FCA predicts that by banning the practice of charging backdated interest it will be saving consumers an estimated £40-60 million a year.
These measures should be welcomed as part of the regulator’s broader focus on protecting customers within the consumer credit marketplace. Firms’ ability to charge backdated interest has been a particular bone of contention, with many customers unaware that firms can retroactively appl charges against the entirety of the credit agreement.
Regulatory compliance is clearly a priority, so lenders will need to analyse their historical loan books to assess what financial impact the interest policy changes are likely to have on their future income.
Similarly, providers should re-evaluate their internal policies and procedures when dealing with customers to ensure transparency.
Mechanisms must be put in place to provide clearer information to customers upfront, explain the features of BNPL offers and send appropriate reminders during the period of the offer, giving them suitable opportunity to repay in full if they choose.
Partnering with a trusted third party to ensure that trained staff are available for rapid deployment is a simple measure that can demonstrate to the regulator that firms are doing everything they can to put customers first.