Buy Now Pay Later offerings to be regulated by FCA

Briefing

What's the issue?

Buy Now Pay Later (BNPL) refers to interest-free installment credit which allows borrowers to split the cost of purchases into regular instalments over not more than a 12-month period. Providers of BNPL agreements are not required to be authorised by the FCA and BNPL agreements are outside the scope of most of the Consumer Credit Act 1974 (CCA). While the government recognises that BNPL can be very helpful to consumers, there are concerns around possible consumer harms.

In February 2021, the Woolard Review identified risk areas including:

The way a product is promoted to consumers and presented as a payment option.

Misunderstanding of the product by consumers, including due to a lack of information.

The absence of requirements to undertake affordability assessments.

The potential to create high levels of indebtedness.

Inconsistency of customer treatment when they are in financial difficulty.

Impacts on the wider credit market.

These risks were found to be potentially heightened where borrowers are vulnerable.

What's the development?

On 17 October 2024, the government announced a consultation on measures to regulate BNPL providers. The previous government had consulted on the issue after the Woolard Review (in October 2021 and February 2023) however legislation was not introduced before the general election.

The government's approach is informed by five key principles:

Consumers must have access to simple, clear, understandable and accessible information about loan agreements provided in advance so shoppers can make informed decisions and understand risks.

Consumers should have protection when things go wrong.
Consumers should only be lent to if it is affordable.

Regulation should be proportionate to ensure continued access and choice.

Regulation must be introduced urgently to ensure consumers are protected and the sector has certainty.

It proposes the following outcomes:

FCA supervision – BNPL firms will be required to get FCA authorisation and will be subject to ongoing supervision.

Clear information – the government will disapply some of the CCA information requirements that could lead to poor consumer outcomes and the FCA will be able to introduce more appropriate requirements which are suitable to an online environment. Information will have to be given in advance of consumers entering into credit agreements.

Key statutory rights - users of BNPL services will be given so-called section 75 rights which will entitle them to claim refunds and make complaints to the financial ombudsman.

Independent complaints handling – the FCA will be able to make rules on complaints handling.

Affordability and creditworthiness assessments - BNPL businesses will be required to check shoppers are able to afford repayments before offering them credit.

The government now proposes amending legislation "with urgency" to achieve its desired outcomes by:

Removing "regulated deferred payment credit agreements" from the exemption in article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO). Credit broking related to these agreements will remain excluded from regulation unless the activity is carried out in a customer's home.

Disapplying certain Consumer Credit Act 1974 (CCA) information requirements for BNPL agreements. The FCA will develop a bespoke disclosure regime aligned with its Consumer Duty.

Amending the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO) to ensure that financial promotions made by unauthorised persons offering third-party BNPL agreements requires approval from an authorised person.

Establishing a temporary permissions regime (TPR) that allows unauthorised firms to continue BNPL lending while awaiting full authorisation.

HM Treasury has also published a draft version of the Financial Services and Markets Act 2000 (Regulated Activities etc) (Amendment) Order 2025, which includes the relevant amendments to the CCA, the RAO and the FPO, as well as the legislative framework for the TPR.

The consultation closes on 29 November 2024. The FCA welcomed the government's consultation and will consult shortly after the legislation is finalised on its regulatory regime for BNPL. The FCA expects to regulate the sector 12 months after the legislation is made.