The United Kingdom has finalised a regulatory framework for the Buy Now Pay Later sector, marking a shift in oversight for an industry that is likely to grow from $11.46 billion in 2023 to over $58.72 billion by 2030.
After HM Treasury’s consultation in October 2024, the government responded in May 2025 with draft legislation to regulate the previously unregulated sector under the Financial Conduct Authority (FCA). The new regulations, which took effect on 15 July 2026, will extend protections to millions of UK consumers by tackling issues such as uninformed decisions, inadequate affordability checks, and rising debt in a sector not previously regulated by traditional consumer credit laws.
Growth of BNPL in the UK
BNPL is a form of credit allowing consumers to spread payments for goods and services over a number of instalments, typically three or four, without incurring interest if payments are made on time. The sector’s rapid expansion has made BNPL offers ubiquitous at online checkouts, with dominant providers including Klarna, Clearpay, and PayPal.
Usage has increased from 14% to 25% of UK adults within a year, with growth initially driven by younger consumers but increasingly adopted by older demographics.
The average transaction value stands at approximately £60, although BNPL is used for a wide range of purchases from clothing and electronics to travel and entertainment. While the product offers interest-free credit if repayments are timely, missed payments can lead to late fees and negative impacts on credit files.
What is the rationale behind the new regulations?
Before regulation, BNPL largely avoided traditional consumer credit laws, leading to worries from regulators and consumer advocates about affordability, transparency, and increasing debt.
BNPL providers now need FCA authorisation as consumer credit lenders. They must conduct affordability checks before extending credit, preventing consumers from borrowing more than they can afford and addressing a major issue in the sector.
Consumers will receive clear, upfront information detailing payment schedules, amounts due, and consequences of missed payments. Additionally, those experiencing financial difficulties will be directed to debt advice services before debt collection actions are pursued.
Key FCA rules from Policy Statement PS26/1
The FCA’s Policy Statement PS26/1 states rules and guidance for BNPL providers.
Affordability assessments. BNPL lenders must carry out proportionate affordability checks before credit is granted. These checks should consider the consumer’s income, expenditure, and existing financial commitments to prevent unaffordable borrowing.
Clear communication. Firms are required to provide transparent information about the credit agreement, including payment schedules, total repayment amounts, and the consequences of missed or late payments.
Arrears and forbearance. The FCA mandates that firms adopt fair and consistent practices when dealing with customers in arrears. Lenders must offer appropriate forbearance measures and signpost consumers to free debt advice.
Financial promotions. All marketing and promotional materials must be clear, fair, and not misleading. Firms must ensure that advertisements do not encourage irresponsible borrowing.
Complaints handling. BNPL providers must have effective procedures for handling consumer complaints and cooperate fully with the Financial Ombudsman Service.
Data sharing. Firms should use data-sharing technologies and credit reference agencies to conduct accurate affordability assessments of consumers’ financial positions.
Compliance framework and industry standards
BNPL lenders will be required to comply with the FCA’s Consumer Duty, adhere to recently strengthened rules on arrears and forbearance in the Consumer Credit Sourcebook, and observe the Breathing Space (Debt Respite) Scheme. The Breathing Space scheme allows debtors to obtain temporary protection from creditors while they receive debt advice and establish payment plans.
The government has opted to disapply the disclosure requirements under the Consumer Credit Act 1974 for BNPL products, with the FCA instead drafting bespoke rules to ensure borrowers receive information that is simple, clear, and accessible.
Third-party lenders will not be subject to the enforcement sanctions under the CCA for BNPL agreements, namely, unenforceability of agreements and disentitlement of interest.
Instead, they will operate within the FCA’s principles-based regulatory approach.
This reform updates the regulatory framework by replacing the outdated CCA regime with a system that better aligns with current borrowing practices.
Legal protections and Section 75
A key improvement under the new rules is that section 75 of the Consumer Credit Act now covers BNPL purchases over £100.
This protection, which applies to credit cards, now allows consumers to make claims against both the BNPL provider and the retailer for purchases up to £30,000 if the goods or services are faulty or not delivered.
For purchases under £100, which make up a large part of BNPL transactions, some providers offer optional buyer protection plans. For example, Klarna provides a “buyer protection” policy for smaller purchases.
Scott Dawson, CEO of DECTA, said, “From 15 July, whether a shopper gets the new affordability checks, access to the Financial Ombudsman and potentially Section 75 protection depends on two things they cannot possibly see at the checkout – whether the lender happens to be a different business from the merchant, and whether the agreement was entered into before or after a particular Wednesday in July. One of the big selling points of BNPL in retail was how easy it is to just put a purchase on a three-month repayment plan with barely a thought, but now knowing how you’ll be protected depends on understanding this regulation and then how a particular retailer relates to the company providing the credit.”
“That’s a strange place to land for a regime built on transparency. Consumer risk doesn’t change according to the corporate structure sitting behind the credit, and the carve-out for merchant-provided DPC is most valuable to the largest retailers and platforms, precisely the businesses with the balance sheet to lend on their own account. Smaller merchants, who depend on third-party providers, will carry the regulated cost while their biggest competitors do not,” he added.
Merchant exemptions and financial promotions
Merchants offering BNPL agreements directly to consumers will continue to benefit from the exemption under Article 60F(2) of the Regulated Activities Order. However, HM Treasury confirmed that it will maintain ongoing oversight of the merchant-provided credit sector and intervene if potential consumer harm or significant change is detected. The exemption of merchant-owned credit was a decision the government made in 2024.
Regarding credit broking, merchants offering BNPL agreements will be exempt from FCA credit-broking authorisation, except where the activity occurs in a consumer’s home. HM Treasury is considering extending the exemption to activity in consumers’ homes, though the current draft legislation reflects the consultation position.
Financial promotions of BNPL agreements by unauthorised merchants will require approval by an authorised firm.
While this role would usually be fulfilled by the third-party lender, firms within the temporary permissions regime can only approve their own promotions, not the financial promotions of unauthorised merchants. Merchants will need to review and update their marketing arrangements to comply with the revised financial promotions regime, including entering into new approver agreements with authorised firms.
This would curb the shadow credit system, explains Alan Koenigsberg, Founder/CEO, Koenigsberg Insights, in one of his previous TTP articles, The BNPL time bomb:How “Buy Now, Pay Later” is rewiring American debt.
Every side has two coins: Concerns over the regulations
Despite the regulatory advances, concerns persist regarding potential unintended consequences. It is estimated that up to 30% of current BNPL users could be rejected under the new affordability checks, with nearly half of those having no history of missed payments. This includes responsible users, and alternatives could be a shift toward high-cost or illegal lenders.
San Nakra-Shah, Co-Founder and Managing Partner at ChilliMint Europe Limited, said, “BNPL was built for the want-not-need purchases – the trainers, the gadget, the £80 dress you talk yourself into. The issue is it’s now supporting far more routine spending, like groceries, school uniforms and energy bills. UK households are facing steep rises in the cost of living, and estimates suggest around 1.6 million people have used credit, including BNPL, to help cover everyday bills.”
“BNPL is frictionless and available exactly when people need it, offering quick access to credit at the point of purchase for consumers who may not qualify for, or choose not to use, more traditional forms of borrowing. It’s not hard to see why it took off. But every form of credit gets the seatbelt fitted once enough people are driving too fast in it – store cards went through this in the 2000s, payday lending in the 2010s. BNPL’s turn has simply come round.”
“Demand for short-term credit won’t disappear when BNPL becomes harder to access, so are we solving the problem, or just moving it somewhere less visible? As the market evolves, are we paying enough attention to the consumers who may end up caught in the middle?” She added.
The increased compliance burden may reshape the BNPL market, favouring larger providers and potentially reducing consumer choice.
Also, third-party BNPL lenders will face significant adaptation requirements under the new regulatory system. These companies will incur both initial and ongoing costs related to FCA authorisation, compliance with regulatory requirements, annual fees and levies, as well as expenses arising from Financial Ombudsman Service complaints and section 75 obligations under the Consumer Credit Act.
Real-time affordability checks using data-sharing technology will significantly raise costs for BNPL lenders.
Affected lenders need to invest in upgrading their systems for proper affordability assessments.
It’s advisable for these firms to form working groups to manage the authorisation process and seek external legal assistance.
The new regime for BNPL users aims to improve borrowing decisions and enhance consumer protections by providing access to the Financial Ombudsman Service and enabling section 75 CCA refund rights.
However, these protections may result in increased friction in accessing BNPL services as providers adjust to the new regulatory requirements.
The overall effectiveness of the new regulations depends on the FCA’s rulemaking, industry compliance, and ongoing monitoring of market developments.
BNPL is becoming safe for customers, but what about businesses? Read our Transaction Banking and Payments Editor, Joy Macknight’s article on How to make BNPL safe for small and medium size enterprises (SMEs)?
