BNPL Firms Enthusiastic As UK Government Unveils Legislation

Buy now, pay later (BNPL) firms and other stakeholders have applauded the UK’s new Labour government for introducing regulation that will bring firms into the scope of supervision from the Financial Conduct Authority (FCA). 

The new legislation brings an end to a string of consultations and commitments that extend back to 2021. 

Stakeholders have until November 29 to respond to the government’s consultation on the new regulatory proposals.

Final legislation is subsequently expected to go before parliament in early 2025, after which the FCA will finalise the rules so they can take effect in 2026, bringing clarity to the sector after years of uncertainty about how it will be regulated.  

“Congratulations to Tulip Siddiq and the government on moving quickly! They have been working with the industry and consumer groups long before coming into office,” commented Sebastian Siemiatkowski, CEO of Klarna. 

“We’re looking forward to carrying on that work to put proportionate rules in place that protect consumers, while fostering growth.”

The move has also been welcomed by Clearpay, the BNPL firm owned by Block. 

“It is encouraging that HM Treasury has listened to industry feedback and evolved the previous framework to ensure a more proportionate approach to regulation,” said Michael Saadat, international head of public policy at the Australian founded company.

Saadat added that the company has “always called for fit-for-purpose regulation that prioritises customer protection, delivers much-needed innovation in consumer credit and that sets high industry standards across the board”.

Despite the new regulatory obligations being introduced, it was possible for firms to be regulated by the FCA to perform consumer credit activities, as has been the case with BNPL provider Zilch. 

In a statement shared with Vixio, the company’s CEO, Philip Belamant, said that “we welcome this news and are pleased to see the new city minister and government moving quickly, closing the loophole in BNPL and creating a level playing field for the whole lending sector”.

Throwing down the gauntlet to its competitors in the industry, Belamant said that “we will be using the six-week consultation period to call upon our industry, which is known for and prides itself on innovation and speed, to propose that regulation-day itself is brought forward and happens in 2025”.

What now?

Under the proposed regulations, BNPL companies will be required to assess affordability before extending credit, helping to prevent customers accumulating unmanageable debt. 

This move will empower the FCA to implement rules mandating that lenders confirm a borrower's ability to repay before offering a loan.

BNPL companies will also need to provide simple, clear and accessible information about loan terms upfront, allowing consumers to make fully informed decisions.

In addition, current Consumer Credit Act information disclosure requirements will be modified, enabling the FCA to create tailored guidelines suitable for the digital environment where BNPL products are predominantly used.

The government has said that the proposed regulations will result in enhanced consumer rights, as BNPL users will be able to access quicker and more effective solutions if issues arise with purchased products. 

This includes the application of Section 75 of the Consumer Credit Act, which allows consumers to seek refunds from their lender, and expanded access to the Financial Ombudsman Service for complaint resolution.

“Millions of people use buy-now, pay-later to manage their finances, but the previous government’s dithering and delay left them unprotected,” commented Tulip Siddiq, treasury minister.     

Siddiq has long been clear that a Labour government would act fast on BNPL regulation, having accused the previous Conservative administration of “putting consumers at risk from exploitation by bad actors in the market and of getting trapped in debt” in a letter calling for her counterpart to move ahead with reforms in November 2023. 

“We promised to take action before the election and now we are delivering,” Siddiq said. “Our approach will give shoppers access to the key protections provided by other forms of credit while providing the sector with the certainty it needs to innovate and grow.”

FCA regulation, including the Consumer Duty

The FCA also welcomed the government’s move. “We have long called for these products to be brought into our remit,” the regulator said in a media statement. 

Once legislation is finalised, the FCA will consult on proposed rules for the BNPL sector, with the new rules expected to take effect 12 months after the legislation is enacted.

Key aspects will include clear information for borrowers, affordability checks and adherence to existing credit regulations, and firms will also be in scope of the Consumer Duty. 

BNPL operators will need to seek FCA authorisation, with a temporary permissions regime (TPR) allowing them to operate while their applications are processed. 

Despite not yet having regulatory oversight of these firms, it has been evident that the FCA has wanted to act in this space for sometime. 

For example, it secured changes to potentially unfair and unclear terms in the contracts of Clearpay, Klarna, Laybuy and Openpay in 2022 and QVC and PayPal a year later. 

The regulator also previously issued a warning to the industry that the financial promotion of all BNPL products must comply with financial promotion rules.

Smiles all around?

The move to regulate BNPL has seemingly pleased most that had been pushing the government to act. 

For example, Chris Woolard, author of the 2021 Woolard Review, which looked at change and innovation in the unsecured credit market, called it a “significant milestone”.

“The proposed package of regulation would implement the recommendations of the Review and mean millions of people up and down the UK will benefit from stronger financial protection as they borrow using BNPL, especially the most vulnerable in society,” he said, adding that the incoming regulation will also provide long-term certainty and standards for the market.

Meanwhile, Rocio Concha, Which? director of policy and advocacy, said it is “positive that new rules are coming in that should provide much-needed protections for users of these products”.

“We are keen to see legislation quickly passed to ensure that BNPL users are protected as strongly as consumers using other credit products,” she said.