The Financial Conduct Authority (FCA) have published initial feedback and guidance in relation to Buy Now Pay Later (BNPL) deals, which are defined as deals that allow a customer to pay later, typically up to 12 months later, during which time the customer pays no interest. However, where the customer misses a payment, the lender charges interest, usually back dated. The FCA found that around 50% of customers did not repay the full balance within the period. While the proposals are designed to capture BNPL deals which back-date interest upon late payment, they may capture other forms of BNPL deals. Additionally, the FCA’s consultation includes changes to store and catalogue credit facilities which are fairly significant.
The FCA found that consumers did not consider point of sale, store or catalogue finance as a form of borrowing and thus did not fully appreciate the need to repay or the effect on their credit file. The FCA aim to address this, together with concerns about the interests charged and constant indebtedness with a range of new rules.
Lenders offering BNPL deals must now:
Provide adequate explanations to the borrower explaining the impact on their credit file, the nature of the product and manner in which the interest is repaid (more about that below!)
Prompt customers that a payment free period is coming to an end and thus payment must be made, or interest will be charged. This rule will apply to all BNPL providers who provide such payment free periods. The FCA are not proposing a specific timescale that the above needs to be provided in, however, it must be in plain, easy to understand language.
Although just guidance, those offering point of sale credit, store credit and catalogue credit should give enough information in adverts and pre-contractual information to inform the customer of the features, risks and benefits of the product. This could, or should, include information about the circumstances in which interest is chargeable, how interest will be calculated, rate of interest and other consequences of non-repayment.
Take steps to intervene where the customer reaches 18, 27 and 36 months of debt where the customer has paid off more in charges and interest than the principle.
Equally lenders will be unable to:
Backdate interest to the point of sale where payment was missed later on, this is the main new rule. Essentially the FCA is ensuring that lenders give the customer credit for the payments they have made and thus interest should not be charged on the amount paid. This will be a new rule and, in line with the adequate explanations above, the fact that late payment may result in interest charges from the date of last payment, will need to be made clear to the customer at the point of purchase.
Increase or offer to increase the customer’s credit limit where they have been advised that the customer does not want to have any credit limit increases (CLIs). Lenders must permit a customer to reduce or decline offers to increase the credit limit and tell the customer of a proposed increase in the credit limit under the agreement at least 30 days before the increase comes into effect. The exception to this is if the customer has specifically requested the increase.
Increase credit limits where the customer is in financial difficulty. Granted most firms have this policy already in place, however, one thing we see is that there are significant improvements to the way in which this process is implemented. For example, firms often apply a narrow definition of financial difficulty waiting for their employee to identify a set of limited triggers before triggering the process which prevents credit limit increases. What this misses is the number of wider information based triggers which should be used to identify financial difficulty.
The FCA are proposing a three-month implementation period for the majority of the above rules and this may include changes to current contracts, so lenders need to start reviewing their BNPL offers, contracts and promotions. For further guidance and information do not hesitate to Contact Us!