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The UK’s new Labour government has launched a public consultation on proposals to regulate buy now, pay later (BNPL) companies under the Financial Conduct Authority (FCA).
The plan aims to apply the Consumer Credit Act to these services, ensuring that consumers receive clear information, avoid unaffordable borrowing, and have stronger rights in case of disputes.
New rules would require BNPL companies to assess a borrower's ability to repay before extending credit, helping to prevent unmanageable debt.
These companies must also provide clear, simple loan terms upfront to help consumers make informed decisions, and the FCA will develop tailored guidelines for the digital landscape where BNPL products are typically used.
The proposed regulations also strengthen consumer rights, enabling faster solutions if issues arise with purchases. This includes extending Section 75 of the Consumer Credit Act for refunds and expanding access to the Financial Ombudsman Service.
The consultation will end on November 29, 2024, with final legislation expected in early 2025 and rules taking effect in 2026.
The bigger picture
The UK has had a high degree of consensus on the need for regulation of BNPL regulation for some time now.
The likes of Klarna and Clearpay have pushed for it, as has the FCA and parliamentarians such as Labour’s Stella Creasy, who in 2021 described BNPL as risking being the “true villain” of Christmas if regulatory action was not taken.
The FCA has previously attempted to use the tools at its disposal to oversee BNPL firms in lieu of a specific framework.
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.
The Labour Party had been adamant prior to entering government in July 2024 that it would take swift action to regulate BNPL, so it is unsurprising that the foundations for legislation have been put to consultation so that regulation can be laid before parliament swiftly.
The UK had been one of the first countries to begin considering measures to regulate the unsecured credit market back in 2021, when the Woolard Review was published, but other countries and jurisdictions have since jumped ahead.
Several regulatory bodies around the world have introduced measures to enhance consumer protections for BNPL services.
In Australia, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 introduced new licensing requirements for BNPL providers.
And earlier this year the US Consumer Financial Protection Bureau (CFPB), issued a rule classifying BNPL loans as subject to certain credit card regulations under Regulation Z, including dispute and refund rights.
In December 2023, the Saudi Central Bank (SAMA) published BNPL regulations and the United Arab Emirates implemented its own BNPL framework.
Finally, the EU's updated Consumer Credit Directive was published in the Official Journal of the EU in October 2023, updating consumer credit regulations to include BNPL.
What needs to be done?
Companies that currently operate without strict oversight must now comply with FCA regulations, including conducting affordability checks and providing clear, accessible information to consumers. This will likely increase operational costs, as firms will need to invest in systems and processes to meet requirements.
From 2026, firms operating in this industry will need be licensed under a specific BNPL authorisation. Although the temporary permission regime that the FCA has committed to creating for firms to operate through while they complete this process will mean that operations can continue, this will also mean complying with the regulator’s expected BNPL requirements and will put firms under closer scrutiny.
Meanwhile, payments and banking firms that are offering BNPL products, such as Monzo and its Flex product, will also need to ensure that their offerings meet the new regulatory standards.
If they do not already do so, these payment service providers will have to integrate compliance mechanisms into their lending processes, which may involve additional costs for technology upgrades and employee training.
In addition, the FCA has already confirmed that BNPL firms will be expected to comply with the Consumer Duty.
This will mean ensuring that their customer support is easily accessible, timely and as straightforward to use for resolving issues or cancelling products as it was to purchase them.
Firms would also do well to equip customer service teams with the training and tools to handle inquiries efficiently, especially for customers in vulnerable situations, such as those facing financial difficulties or poor health.
Additionally, BNPL firms should ensure their products are tailored to meet the specific needs of different customer segments, rather than adopting a one-size-fits-all model.
This focus on product suitability will help customers access options that genuinely align with their financial situation.
Companies should also engage in responsible marketing practices, avoiding tactics that could pressure consumers into taking on unnecessary or unaffordable debt.
Meanwhile, to support vulnerable customers, firms need to develop systems that can identify those who might be in challenging situations, such as financial hardship, health issues or other life difficulties.
As BNPL spreads payments, which can be beneficial to users, firms should also be mindful that customers using it may not have the financial means to take on such agreements.
BNPL firms should also leverage data analytics to analyse borrowing trends, identify risks, and develop strategies to improve customer outcomes. By using predictive modelling, they could more efficiently identify customers likely to struggle with repayments, allowing for timely interventions to prevent financial harm.
Why should you care?
Although there has been consensus across the board that some form of regulatory oversight for BNPL is necessary, that does not mean that the regulation will come without challenges.
BNPL firms will have to prepare themselves for renewed scrutiny from the FCA in how they market their products and services and how compliant they are with the regulator’s rules and expectations.
Some are already under FCA supervision. For example, Klarna has been authorised as a payments institution in the UK since November 2023 and Zilch is regulated under consumer credit rules.
Ultimately, firms have been waiting for these rules for a long time. The previous Conservative government had edged towards regulating BNPL and the FCA used what tools it could to take action against firms that it was concerned about.
This increased scrutiny could be seen as a trial for firms in preparing for actual regulation. Fears over bad press and criticism from organisations such as Which? is likely why some firms are taking consumer protection matters into their own hands.
For example, Klarna began sharing borrowing data with credit reference agencies in the UK in 2022.
Now that regulation is here, so is clarity, and while firms will need to implement new rules effectively, this could be exactly what BNPL needs to remain respectable.
