The major buy now, pay later companies Clearpay, Klarna, Laybuy and Openpay have agreed to change “potentially unfair and unclear” terms and conditions after an intervention from the financial regulator.
The Financial Conduct Authority (FCA) said it was able to use consumer law to enforce the changes. However, the regulator acknowledged that it was still lacking the powers to regulate the sector to the same standard as other consumer credit companies.
The companies were made to change contract terms on cancellations and continuous payment authority to make them “fairer and easier to understand”, the FCA said. Clearpay, Laybuy and Openpay also agreed to refund some late payment fees they had wrongly charged after customers cancelled orders.
The use of buy now, pay later (BNPL) has exploded in recent years, with an FCA review last year finding that the UK market had trebled in size in 2020 alone, even as other forms of short-term consumer credit such as payday lending fell back after being forced to improve their consumer protections. The market is worth an estimated £6.4bn a year in the UK, according to the consultancy firm Bain & Company, and is used by about 10 million shoppers.
The government is considering bringing in new rules for the sector but has yet to detail what action it will take.
BNPL services are usually offered at the point of sale online, allowing shoppers to pay in instalments. Unlike payday lenders or credit cards, BNPL lenders typically do not charge interest on loans, meaning they avoid current regulations. Retailers instead pay the companies fees.
The rapid growth – and the prospect of lending platforms spreading to retailers around the globe – has helped BNPL companies to huge valuations usually enjoyed by Silicon Valley tech companies rather than consumer credit firms. The Swedish company Klarna was valued at $45bn in a June investment round backed by SoftBank, the Japanese investment fund.
Stella Creasy, the Labour MP for Walthamstow, criticised the FCA’s “whack-a-mole approach” to targeting BNPL companies. She told the Guardian they were the latest example of “legal loansharking”, in which consumers are encouraged to get into the habit of borrowing money they cannot afford to repay. That was a problem regardless of whether the consumer was charged interest, she said.
“This is why we urgently need regulation and it needs to be regulation on a par with the regulation that every other consumer credit company has to abide by,” said Creasy, who played a prominent part in the stricter regulation of payday lenders such as the collapsed Wonga. “These companies and the government are promoting the idea that this is a different industry and needs slightly different regulation.
“You can buy a pizza on buy now, pay later. How is that any different to borrowing on a credit card?”
Klarna and Laybuy said they backed calls for the sector to be regulated directly by the FCA rather than more general consumer laws.
Alex Marsh, the head of Klarna UK, argued that Klarna was “a fairer and more sustainable way for consumers to access credit” because it did not charge consumers fees or interest on the loans. He said the company had welcomed the FCA’s intervention, and that it always made clear it was offering a credit product.
Gary Rohloff, who co-founded Laybuy in New Zealand before listing its shares in Australia, said the company was “absolutely committed” to “fair and transparent” terms.
A Clearpay spokesperson said the FCA action affected a “very small group of customers who may have incorrectly been charged a late fee”, and added that it wanted to be “as transparent as possible”.
An Openpay spokesperson said the company welcomed the guidance from the FCA, and backed “fair and proportionate regulation”.
Sheldon Mills, the FCA’s executive director of consumers and competition, said: “Buy now, pay later has grown exponentially. 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.
He added that he hoped the rest of the industry would follow the four firms’ voluntary changes to conditions.