Clarity on what regulation for the buy now pay later sector might look like has been much anticipated since the Woolard Review recommended urgent action back in February 2021. The Government is now reviewing the feedback from the Treasury’s consultation on the regulation of BNPL, which was launched in October 2024 and is expecting to finalise legislation in the first half of 2025. The Financial Conduct Authority (FCA) will then consult on the final regulatory regime, with final rules expected to be implemented in the first half of 2026.
Spending via BNPL continues to gain momentum. BNPL made up 13.9% of the UK's online Christmas spending in 2024, equating to £3.6 billion and representing a 9.1% increase year on year. It also found that half of all adults in the UK have used BNPL at some point, a significant increase from 35% at the start of 2023. The concern is that consumers can take on debt they can't afford and are often unaware of the associated risks. Research shows that only 52% of BNPL users are aware of late payment fees, 15% have incurred late fees, rising to 22% for those with ‘poor’ or ‘very poor’ credit scores.
However, the Government and FCA recognise the benefits that BNPL can bring when used responsibly and want to ensure their approach to regulation is proportionate.
Key pillars of future regulation
While the FCA has yet to design the final rules, the key pillars that the Government intends will apply to the future regulatory regime for BNPL include the following:
- Affordability and creditworthiness assessments – to reduce the risk that borrowing is unaffordable
- Independent complaints handling – consumers will be able to take complaints to the independent Financial Ombudsman Service
- Key statutory rights – consumers will benefit from key protections in the Consumer Credit Act 1974 (CCA), such as section 75 which allows consumers to claim refunds from their lender
- Credit reporting – requiring lenders to report fully on BNPL to credit reference agencies
- Clear and sufficient information about the risks involved – noting certain information and disclosure requirements in the CCA will be disapplied as the FCA wants to ensure a more proportionate approach for BNPL, given the short-term nature and lower value of credit provided
- FCA supervisory oversight – BNPL firms will need authorisation from the FCA and will be subject to ongoing supervision
- Consumer Duty - firms will have to comply with the Consumer Duty, acting to deliver good outcomes to consumers
Regulation will be limited to agreements offered by third-party lenders. Agreements provided directly by merchants will continue to be exempt from regulation.
BNPL lenders should be aware of, and prepare for, the impact of implementing these key pillars.
Assessing the impact of affordability assessments
Many BNPL lenders already conduct affordability assessments, with major industry players welcoming the change to level the playing field. However, some lenders will need to implement or undertake more rigorous affordability checks, and have clear and effective policies to ensure fair and appropriate treatment of customers in vulnerable circumstances or financial difficulty.
There will be certain cohorts of borrowers utilising BNPL who won't meet affordability criteria, especially when coupled with the greater visibility of BNPL loans from alternative providers due to the requirement to report to credit reference agencies. This is borne out by Citizens Advice research which shows that nearly a third of BNPL users who were due to make a payment borrowed money to repay their instalments.
BNPL lenders have always had to balance originating enough loans to support sales while ensuring default rates and credit losses are limited. Considering the high-volume, low-margin nature of the sector, firms must carefully model and assess the impact of the new affordability requirements on their business.
Financial implications of Section 75 and access to the FOS
Section 75 of the CCA is a well-known and widely used consumer protection that will apply to newly regulated BNPL agreements. BNPL lenders will become jointly and severally liable with the retailer, meaning consumers will be able to claim refunds from their lender if a product is faulty, or doesn't arrive. While these consumer rights will apply to purchases over £100 (and therefore above the typical average value of a BNPL transaction), many firms facilitating retail payments voluntarily offer protection for lower value purchases. BNPL firms will need to carefully consider the implications of this as it could have a significant financial impact on firms given the volume of retail returns in the UK.
Consumers will also be able to access the Financial Ombudsman Service (FOS) to make complaints. Every complaint to the FOS over the first three free complaints per financial year generates a case fee of £650 (once the FOS confirms it will take the complaint on), noting this may vary depending on outcome and whether the complaint was referred by a professional representative.
While the introduction of a case fee for professional representatives from 1 April 2025 may impede the volume of spurious complaints, lenders will be aware that a high level of consumer complaints and associated compensation payments can have significant financial implications. Historically, this has been a major issue for some consumer credit providers.
Lenders need to be aware of the administrative costs associated with Section 75 claims and FOS complaints, and to put in place efficient processes, together with the staff training to manage them.
They should also undertake careful consideration and due diligence when choosing retail partners. Lenders may need to disassociate themselves from retail partners that generate a disproportionate number of returns or claims relative to the profitability they bring.
Reporting to credit reference agencies
The FCA is proposing mandatory data sharing with designated credit reference agencies for BNPL agreements to enhance the coverage and consistency of information in consumers’ credit files. It will also support lenders with credit checks by providing a clearer view regarding consumers' creditworthiness, reducing the ability of consumers to take out BNPL or other credit beyond their means.
Consumers are well informed about their credit file. Poor reporting or data quality from lenders can affect the availability or cost of credit and can lead to complaints to the FOS. While some BNPL firms already report to the credit reference agencies, it's important that all lenders ensure they put adequate processes in place to collate and extract accurate data, which they can report on a timely basis.
Complying with the Consumer Duty
Lenders will be subject to the Consumer Duty, raising the regulatory bar further for firms as they'll need to ensure that their products are delivering good consumer outcomes. The Duty also requires firms to ensure communications allow consumers to make effective decisions and that consumers are appropriately supported throughout the life of the loan.
Consideration should be given to how lenders can evidence good outcomes to the FCA. This is especially in light of FCA research showing that BNPL usage was associated with higher use of other credit products, including high-cost credit, and signs of falling into difficulty with debt.
Information requirements
Certain information requirement provisions in the CCA aren't relevant for BNPL, and many of these will be disapplied. Instead, the FCA will design bespoke requirements for BNPL, drawing on Consumer Duty guidelines. Lenders who offer other regulated credit agreements (which must comply with CCA information requirements) alongside BNPL may therefore find themselves having to adhere to two separate standards.
In order to simplify internal systems and processes, BNPL lenders may choose to provide information in accordance with the CCA’s information requirements for their BNPL lending rather than the proposed BNPL information regime. However, the Government has stated that it is not going to legislate to allow firms to voluntarily comply with the CCA’s information requirements. It also remains to be seen whether the FCA will allow for this when it finalises rules for the sector.
The Government has committed to reforming the CCA, recognising that it has failed to keep up with the changing ways people engage with credit. However, any reform of the CCA is not due to follow the same timeline as BNPL regulation, and there may be yet more change for lenders to navigate in the future.
For more information or advice, contact Chris Laverty or Jarred Erceg.
