Buy now pay later: FCA consults on final rules for the sector

On 18 July, the FCA published consultation paper CP25/23, outlining its proposed rules and guidance for buy now pay later (BNPL) lenders. The regulator is expected to issue its policy setting out final rules early next year, with regulation coming into force on 15 July 2026. Regulation will be limited to third-party lenders. Agreements provided directly by merchants will continue to be exempt from regulation.

The temporary permissions regime will be open for firms to register two months before this date. Firms will then have six months (from 15 July 2026) to apply for full authorisation.

Meanwhile, spending via BNPL continues to gain momentum and remains a popular form of flexible credit. The total value of BNPL transactions in 2024 was £13.8 billion, up from £1.2 billion in 2019. FCA analysis shows that BNPL users are, on average, younger and less creditworthy, with higher levels of unsecured debt. They're also almost twice as likely to be in serious financial distress compared to the wider UK population. However, when used responsibly, BNPL can be a helpful tool for managing finances, particularly smaller purchasers, which aligns with the FCA’s strategic priorities for helping consumers navigate their financial lives.

What are the key areas of focus for future regulation?

The FCA recognises the benefits that BNPL can offer and wants to ensure its approach to regulation is proportionate, reducing the risks of harm to consumers while supporting growth and innovation. The consultation paper focuses on five key areas for improvement. 

Information requirements

Many of the information requirement provisions in the Consumer Credit Act (CCA) aren't relevant for BNPL. Therefore, the FCA will be designing a more bespoke regime, ensuring consumers have sufficient information to help them make informed and effective decisions about their borrowing prior to entering into and throughout the life of an agreement.

While the FCA won't impose new prescriptive rules for in-life disclosures, firms are encouraged to use various communication channels (SMS, push notifications, emails) to notify customers of upcoming or missed payments to help them manage their obligations.

The FCA wants to offer flexibility in how customers are informed, ensuring it's done in a manner that promotes good outcomes and aligns with the Consumer Duty.

Creditworthiness and applying existing Consumer Credit Sourcebook (CONC) rules

Many BNPL lenders already conduct creditworthiness assessments, with major industry players welcoming the change to level the playing field. However, some lenders will need to implement or undertake more rigorous checks and have clear and effective policies to ensure they're compliant and treating customers appropriately, particularly those in vulnerable circumstances or financial difficulty.

There will be certain cohorts of borrowers utilising BNPL who won't meet affordability criteria. This is borne out by research from Citizens Advice which shows that nearly a third of BNPL users who were due to make a payment borrowed money to repay their instalments.

In CP25/23, the FCA acknowledges that there could be a reduction in BNPL transactions due to firms needing to undertake creditworthiness assessments. Considering the high-volume, low-margin nature of the sector, firms should assess the potential impact applying CONC creditworthiness rules may have on origination volumes and arrears rates.

The Consumer Duty and delivering good outcomes to consumers

Lenders will be subject to the Consumer Duty, raising the regulatory bar further for firms as they'll need to ensure that their products are delivering good customer outcomes. The Consumer Duty will require firms to assess, test, understand and evidence the outcomes their customers are receiving.

Accordingly, lenders will need to establish a robust framework for collecting data and testing actual outcomes their customers experience throughout the product lifecycle. The focus should be on assessing if products deliver fair value, prevent foreseeable harm and meet customer needs in order to provide a good customer outcome.

Dispute resolution

Consumers will be able to access the Financial Ombudsman Service (FOS) to make complaints. Every complaint to the FOS over the first three complaints per financial year generates a case fee of £650, once the FOS confirms it will take the complaint on, noting this may vary depending on the outcome and whether the complaint was referred by a professional representative.

While the introduction of a case fee for professional representatives from 1 April 2025 should reduce the volume of spurious complaints, lenders will be aware that a high level of consumer complaints and associated compensation payments can have significant financial implications. Historically, this has been a major issue for some consumer credit providers.

Section 75 of the CCA is a well-known and widely used consumer protection which will apply to newly regulated BNPL agreements. BNPL lenders will become jointly and severally liable with the retailer, meaning consumers will be able to claim refunds from their lender if a product is faulty, or doesn't arrive. While these consumer rights will apply to purchases over £100 (and therefore above the £70 typical average value of a BNPL transaction), many firms facilitating retail payments voluntarily offer protection for lower value purchases. BNPL firms will need to carefully consider the implications of this given the volume of retail returns in the UK.

Lenders need to be aware of the administrative costs associated with Section 75 claims and FOS complaints and ensure they have a robust and efficient complaint handling process in place to manage them.

Data reporting

The FCA is proposing better data reporting by firms, including product sales data and customer outcomes, so it can effectively supervise the sector. It also plans to consult later this year on introducing a mandatory requirement for BNPL lenders to report to credit reference agencies (CRA).

While lenders don't currently have to do this, it would enhance the coverage and consistency of information in consumers’ credit files and provide a clearer view regarding creditworthiness when performing checks, reducing the risk of consumers taking out BNPL or other credit beyond their means.

How can firms prepare?

With demand for BNPL continuing to grow and the introduction of regulation on the horizon, firms in scope should ensure they're taking the necessary steps now to prepare. Key actions should include:

• reviewing the FCA’s consultation paper thoroughly and conducting a detailed gap analysis to identify any risks or challenges to compliance with the new rules, including the Consumer Duty
• identifying additional resource requirements and assessing the impact to the firm’s financial and operational resilience
• preparing a comprehensive information pack to support future authorisation requirements.

These steps will ensure readiness and alignment with regulatory expectations as the new regime comes into force.

For more information or guidance, contact Chris Laverty or Jarred Erceg.