In a overhaul of the consumer credit sector, the UK government has confirmed plans to regulate Buy-Now, Pay-Later (BNPL) products, marking the end of what officials call the “wild west” of unregulated short-term lending. The changes, announced in the government’s official response to its 2024 consultation, will bring BNPL products under the authority of the Financial Conduct Authority (FCA) by mid-2026.
A New Legal Framework
Under the upcoming regulatory regime, BNPL loans offered by third-party providers—such as Klarna, Clearpay, and PayPal—will be brought in line with traditional consumer credit. These companies will need to secure authorisation from the FCA, carry out creditworthiness and affordability assessments before approving loans, and ensure clear, fair disclosures are provided throughout the life of the agreement. Consumers will also be granted the right to escalate complaints to the Financial Ombudsman Service, and purchases made through BNPL will benefit from the protections under Section 75 of the Consumer Credit Act, allowing for stronger refund rights if things go wrong. Together, these measures aim to create a consistent standard across the sector, giving consumers greater clarity and confidence while preserving BNPL’s role as a flexible way to manage spending.
Exemptions Raise Questions
However, not all BNPL arrangements will fall under the new regime. Merchant-provided BNPL—where retailers themselves offer instalment plans—will remain exempt. The government maintains that these products typically carry lower risks and are akin to traditional layaway or informal payment agreements.
Still, consumer advocacy groups and some industry stakeholders have raised alarms. They fear large online marketplaces could use the exemption to skirt regulatory obligations, undermining the intended protections and creating an uneven playing field. The Treasury has committed to monitoring this space closely and stepping in if signs of consumer harm emerge.
Modern Disclosure, Tailored Oversight
One of the most welcomed aspects of the reforms is a shift away from the outdated and complex disclosure rules embedded in the 50-year-old Consumer Credit Act. BNPL providers will instead follow a new information regime crafted by the FCA—more aligned with today’s digital-first financial products.
This new disclosure regime will be rooted in the FCA’s principles-based Consumer Duty, which emphasises clarity, relevance, and timing. It is expected to replace arcane paperwork with concise digital communications tailored to BNPL’s specific characteristics—such as zero interest but potential late fees..
Sanctions and Enforcement: A New Balance
A notable departure from traditional credit regulation is the removal of automatic sanctions such as the unenforceability of non-compliant credit agreements. These sanctions, embedded in the Consumer Credit Act, were historically a powerful deterrent against misconduct.
Instead, the government believes the FCA’s broader enforcement powers—ranging from supervision and fines to the application of the Consumer Duty—are better suited to the nuances of the BNPL market. Critics, however, warn this may weaken consumer protections unless the FCA imposes comparable safeguards through its rulebook. Some called for this issue to be revisited in future legislative reviews.
Implementation and Transition
To avoid market disruption, a Temporary Permissions Regime (TPR) will allow existing BNPL providers to continue operating legally while they apply for FCA authorisation. Once the Statutory Instrument implementing the rules is passed—likely in late 2025—firms will have up to 12 months to meet the new requirements.
The reform forms part of a broader effort to modernise the UK’s consumer credit framework. The Treasury is also preparing to reform the wider Consumer Credit Act, replacing an outdated, paper-heavy system with a streamlined, pro-growth model fit for digital commerce.
Outlook: Regulating Innovation
Economic Secretary to the Treasury, Emma Reynolds, called BNPL “transformational” for UK shoppers, but acknowledged that its rapid rise left many exposed to unaffordable debt. “These new rules will protect shoppers from debt traps and give the sector the certainty it needs to invest, grow, and create jobs through our Plan for Change,” she said.
The regulatory update will not only reinforce consumer protections but also provide legal clarity for BNPL providers, helping legitimate firms grow within a structured and transparent market.
As other jurisdictions—from Australia to the EU and the U.S.—grapple with similar challenges, the UK’s approach could serve as a blueprint for balancing financial innovation with responsible lending.
