The Financial Conduct Authority (FCA) recently announced forthcoming changes to what has been a controversial area of consumer credit lending.
‘Buy Now Pay Later’ (BNPL) offers have become widespread, both at point of sale and online, with consumers being offered the opportunity to purchase a vehicle or other item without having to pay anything upfront or being charged interest for a fixed period – usually 12 months.
If the customer does not pay off the credit in full by the end of the term, then interest is applied against the entirety of the credit, dating back to the time of purchase.
However, even if the customer pays off a portion of the credit, they are still usually charged backdated interest on that part as well.
The FCA has said that it will ban this latter practice, saving consumers an estimated £40-60 million a year.
It estimates that over a third of consumers do not repay their BNPL loans in full within the offer period, making them subject to high charges.
The FCA has announced three main changes to its consumer credit rules:
- Firms cannot charge backdated interest on money that has been repaid by the customer during the BNPL offer period.
- Firms must provide better information to customers about BNPL offers and “appropriately reflect the risks as well as the benefits of the product”.
- Firms must give prompts to their customers to remind them when the offer period is about to end, increasing the likelihood of customers repaying the credit before they incur interest.
In our view, these measures should be welcomed. They are part of the FCA’s broader focus on protecting customers within the consumer credit marketplace. The ability of firms to charge backdated interest has been a particular bone of contention, with many customers unaware of the ability of firms to retrospectively apply such charges against the entirety of the credit line.
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 reevaluate 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.
In this new digital age, customer knowledge and understanding of their rights has increased.
If providers do not seek to align with regulatory changes that safeguard consumers, they may risk their reputation and increase the likelihood of complaints.
Moreover, it is crucial that providers ensure sufficient staff are available to deal with frustrated customers before issues are escalated.
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.
In our experience, a lack of transparency and communication in the first instance only leads to more complaints from customers seeking to clarify their policy terms.
By ensuring that all information is relayed clearly, customers will be more likely to understand the consequences of not repaying the full credit within the set timeframe and complaint levels will subsequently reduce. This will result in better customer satisfaction and free up staff to deal with more complex complaints cases.
As regulatory scrutiny and pressure increases, providers should also be checking that they have appropriate measures in place to safeguard customers, especially when it comes to those in vulnerable circumstances.
This has been an increasing area of focus for regulators and the onus sits squarely on lenders to show that they are treating individuals fairly and appropriately according to their circumstances.
It is important to note that ‘vulnerability’ has a broad definition, which could include those with life-long physical conditions and disability, as well as temporary life events such as divorce, redundancy and bereavement.
Senior management should ensure that their front-line staff are equipped to identify and support vulnerable groups. Developing a robust vulnerable customer framework should be a major consideration for any firm wanting to build a responsible, customer-first business.
BNPL offers have become an established feature of the credit landscape and are attractive to many customers, providing them with greater flexibility over when they pay.
In fact, regulators have acknowledged that PNBL schemes have become invaluable to those who have no other option. It is this group, however, that is most at risk of falling short of paying the full credit back within the set timeframe, often leaving them in excessive debt.
These new rules from the FCA make important changes to the terms of such deals. All lenders should ensure that their customers are treated fairly.
Author: Sean Kulan, consumer credit sector Lead, Huntswood