Peer-to-peer lending platforms offering buy-now-pay-later (BNPL) products could soon face additional regulatory requirements.
The City watchdog is cracking down on providers of BNPL, the service which allows shoppers to order clothes or other goods and settle their bill in instalments. Several P2P platforms offer BNPL, including Funding Circle and Fellow Finance while former P2P platform Zopa is set to introduce its own offering soon.
The government is planning to change the law to bring some of the current forms of unregulated BNPL products into Financial Conduct Authority (FCA) regulation.
While waiting for additional regulatory powers, the FCA was able to use the Consumer Rights Act to assess the fairness and transparency of the terms some BNPL providers offer.
After becoming concerned there was a potential risk of harm to consumers as a result of the way some of the firm’s terms were drafted, the watchdog secured changes to potentially unfair and unclear terms in the contracts of Clearpay, Klarna, Laybuy and Openpay.
The companies are now making terms on issues like contract cancellations and continuous payment authorities fairer and easier to understand, following the regulator’s work.
Furthermore, one of the terms that involved late payment fees has led to Clearpay Laybuy, and Openpay agreeing to voluntarily refund customers who have been charged late payment fees in specific circumstances.
The FCA’s Woolard Review into the unsecured credit market found the use of BNPL products nearly quadrupled in 2020 to £2.7bn.
“BNPL has grown exponentially,” said Sheldon Mills, executive director of consumers and competition at the FCA.
“We do not yet have powers to regulate these firms, but we do have powers to review the terms and conditions of consumer contracts for fairness, and have acted proactively to ensure that the BNPL industry adopts high standards in their terms and conditions.
“The four BNPL firms we have worked with have all voluntarily agreed to change their approach. We welcome this and hope that the rest of the industry will now follow.”
Read more: P2P firms expand into BNPL products
Myron Jobson, senior personal finance analyst at Interactive Investor, welcomed plans for regulation of the BNPL market.
“It is high time that the mushrooming BNPL industry is brought into regulation and be subject to the same rules as the traditional credit industry, requiring things like affordability checks and making sure customers are treated fairly,” said Jobson.
“Many shoppers view BNPL as different from credit cards and are unaware of the cold hard fact that BNPL purchases are a form of credit that could tarnish their credit score if they miss payments.”
Antony Stephen, chief executive of Barclays Partner Finance, said that it is essential that the new rules around BNPL regulation are fit for purpose and protect consumers from spiralling debt.
“Our research identifies the shortcomings of unregulated short-term interest-free credit options and highlights that people are still not clear on the repercussions of not making repayments,” said Stephen.
“Barclays believes all consumer credit products should be subject to the same level of regulation, to avoid an unnecessary two-tier regulatory framework that goes against the best interests of consumers.”