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14 Feb 2022

Major 'buy now, pay later' firms to refund some late payment fees and improve terms

Find out what's changed with Klarna, Clearpay, Laybuy and Openpay plus who qualifies for money back

Klarna, Clearpay, Laybuy and Openpay have agreed to change the terms of their customer contracts to make them fairer and easier to understand after a review by the Financial Conduct Authority (FCA).

The FCA urged the companies to make the changes after it found there was a potential for consumer harm in the way their terms were drafted.

As a result, Klarna, Clearpay, Laybuy and Openpay can no longer suspend a customer's account for any reason without notice, among other things. Plus Clearpay, Laybuy and Openpay will refund some customers who were charged late fees in specific circumstances.

Here, Which? explain what the FCA has announced, as well as who is eligible for refunds with the BNPL firms.

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Why are BNPL firms making their terms clearer?

Ahead of regulating the BNPL industry later this year, the FCA reviewed whether the four major players' terms and conditions were compliant with the Consumer Rights Act 2015.

It concluded there was 'potential harm for consumers' and contacted the firms with its concerns.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA said: '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.'

One of the areas where the FCA identified potential harm was in how BNPL firms handle customer returns.

Refunds for late payment fees

Under the previous terms, if a customer returned their order, they still had to keep paying the instalments until the retailer told the BNPL they'd received the items or processed the refund.

This created problems for some customers. In 2020 we spoke to shoppers who were unfairly charged after returning the item they ordered - including one person who was charged even though the items weren't available, and another who was charged late fees after the retailer didn't inform the BNPL firm their refund had been processed.

The FCA has now announced that the loan agreement should have terminated when the customers returned the goods, in accordance with the Consumer Contracts Regulations 2013.

This will be the case now going forwards. Meanwhile, people who were charged a late fee after cancelling their orders will be due a refund.

Who's eligible for a refund?

Customers of Laybuy, Clearpay and Openpay may be due a refund if they were charged a late fee after cancelling their full order.

You won't be eligible for a refund if you returned only some of the items in the order.

The refunds also don't apply to Klarna customers because Klarna doesn't charge late fees.

A spokesperson for Clearpay told Which?: 'Following recent discussions with the FCA, there is a very small group of customers who may have incorrectly been charged a late fee because we were not notified of them returning a purchase within a certain time frame.

'We will automatically refund impacted customers that we are able to identify and have a dedicated page on our website for customers who may be impacted. We have also updated some wording in our terms and conditions around returns, refunds and account closures.'

If you think you've been affected, you should contact the BNPL firm immediately.

What other changes were made?

These are the other changes that have since been made to the terms of the four BNPL firms:

  • Terms around suspending accounts - As previously drafted, the terms gave companies the right to terminate and/or suspend a customer's account for any reason without notice or restrict a customer's access to their account. The FCA says this discretion was too broad.
  • Set-off right made clearer - If a lender owes money to a customer, the customer has a right to set off (deduct) that amount from any forthcoming instalments. The FCA determined that BNPL firms could refuse customers this right 'inappropriately' in the previously drafted terms.
  • Clearer terms for cancelling a CPA - A continuous payment authority (CPA) is where you give a company permission to take regular payments from your debit or credit card. The FCA was concerned it wasn't clear how to cancel from the terms. The firms have since changed their cancellation terms to make them clearer for consumers.
  • Pausing paymentsmade a contractual right - Some companies - such as Clearpay - allow consumers to pause or suspend payments when they return their orders. The FCA says these firms have now agreed to make this a contractual right where it wasn't already.

Are the changes enough?

In our previous research, we've often found that BNPL firms fail to communicate the risks of using their schemes.

When we analysed 111 of the biggest retailers' checkouts, we uncovered widespread inconsistencies in how they disclosed information about late fees, credit checks and how repayments work.

Many ads on product listing pages did not include key information on late fees or credit checks. In fact, we found nine retailers that did not have any information at all about late fees on their checkout, product listing or BNPL explainer pages.

Clearly, BNPL firms making their terms fairer and more transparent is a step in the right direction.

But because of how these schemes are presented online, it's still all too easy for customers to use them without fully understanding the risks.

What did the BNPL firms say?

The four BNPL firms said they welcomed the announcement.

A spokesperson from Clearpay said: 'Clearpay upholds high standards in how we communicate to our customers and we constantly review our product communications to ensure that we are as transparent as possible.'

Meanwhile, Laybuy told Which?: 'As a result of the FCA's assessment, we have worked hard to simplify our contract terms, including providing greater clarity around what happens in the event of an order cancellation or return, so that they are easier to understand, and we will continue to review all of our contracts as part of our commitment to continuous improvement.'

Alex Marsh, Head of Klarna UK, said Klarna had implemented the FCA's proposed changes in September 2021.

He told Which? that Klarna continuously reviews its terms and conditions, working with Fairer Finance to ensure they're communicating clearly and fairly.

'We have never received a customer complaint specifically related to these Ts&Cs but are always open to ways in which they can be improved,' he said.

Listen: find out what our in-depth interviews with BNPL shoppers uncovered in the Which? Money Podcast and why Which? is calling for BNPL companies to be regulated without delay.