After years of a wild west with no regulation, new rules are being introduced to provide better consumer protection as the Financial Conduct Authority (FCA) takes over regulation of the sector for the first time.

As a result, buy now pay later (BNPL) loans will be subject to the Consumer Duty from 15 July and lenders will have to be authorised by the financial regulator.  

Currently there are no protections in place for BNPL users, a market valued at £13bn in 2024, with high risks for those who use it repeatedly and may not be able to afford it.

Big players in the market are Klarna and Clearpay, and the BNPL market has grown significantly in recent years, from a low level of £600m in lending in 2017 to over £13bn in 2024. One in five UK consumers, equating to a staggering 10.9m people used it in the 12 months ending May 2024, according to the FCA’s 2024 Financial Lives Survey.

Firms will be able to register for a temporary permissions regime between 15 May 2026 and 1 July 2026, and will then have six months from the date the regime comes into force on 15 July to apply for full authorisation. The FCA will provide pre-application support to these firms to help them get ready.

Sarah Pritchard, deputy chief executive at the FCA, said: ‘We want the Buy Now Pay Later sector to thrive – it provides an important source of credit to many – and we will continue to support firms who want to develop innovative new products.

‘But crucially, no one should be lent to if they’re unable to repay because that could worsen their financial situation. Now parliament has given us the powers, we’re putting in place proportionate protections for the 11 million people who use it.’

In future, under the Consumer Duty framework, BNPL lenders will have to provide consumers with clear, upfront details about their agreement, including when payments will be due, amounts, and what happens if they miss a payment. 

There will also be better affordability checks, requiring lenders to carry out proportionate checks to make sure customers can afford to repay what they borrow before offering BNPL. 

These changes will be significant for firms offering deferred payment credit (DPC), with the need to implement systems to meet the new regulatory framework. 

Christos Doumas, director, banking & capital markets advisory & consulting at Forvis Mazars said: ‘For firms offering DPC products, preparation needs to start now. Businesses coming under FCA supervision will need to ensure they are ready for authorisation, compliant with the Consumer Duty, and aligned to the new regulatory requirements from day one.

‘This will require well-structured change programmes, timely updates to systems and processes, comprehensive documentation, and rigorous testing.

‘Senior management teams must be confident they can evidence compliance and demonstrate that good consumer outcomes are embedded throughout the product lifecycle.’

Under the new rules, lenders will also have to ‘offer support to customers in financial difficulty’, the FCA said, and where appropriate, direct them to free debt advice. 

In addition, BNPL customers will have the right to complain and claim compensation through the Financial Ombudsman Service. 

Lenders will also need to offer support to customers in financial difficulty, and, where appropriate, direct them to free debt advice. 

Joe Norburn, CEO, TCC Group, said: ‘While some businesses in the sector argue that increased regulation could restrict access to credit for those excluded from mainstream finance, frictionless customer journeys are currently enabling deferred payment borrowing that can quickly escalate from short-term credit into long-term, unmanageable debt.

‘Usage is particularly high among consumers with low financial resilience, including younger people and those on lower incomes, heightening the risk of financial harm.

‘The incoming regulation relying on the Consumer Duty will provide better protection for end customers. The increased affordability checks and greater transparency at checkout should reduce the risk of over indebtedness and increase customer understanding.’

Under the new rules, BNPL customers will also be able to complain and claim compensation through the Financial Ombudsman Service. 

The new rules only relate to unregulated BNPL agreements, defined as deferred payment credit in the legislation, but will not cover ‘merchant own credit’ where suppliers provide their own credit to customers. This follows a decision by the government in mid-2025 to leave this segment of lending unregulated.

Links

FCA policy statement, Regulation of Deferred Payment Credit (unregulated BNPL), Final Rules