The UK government's spotlight continues to shine firmly on unregulated sectors, with the 'buy now, pay later' (BNPL) market attracting its latest attention. On Monday 19 May 2025, the UK government published its consultation response and announcement that it will bring forward legislation to regulate the BNPL market.
The BNPL product allows consumers to spread their payments for purchases with no interest within a typically 12-month period, provided their repayment obligations are met in full and on time. Despite more than ten million people having accessed the BNPL market in the UK in the last year, the sector has to date remained unregulated and BNPL providers have not had to comply with the requirements of the Consumer Credit Act 1974 (CCA) or the Financial Conduct Authority (FCA) rules.
Under the new legislation, which is due to take effect next year, third-party BNPL providers will need to seek authorisation from and then be regulated by the FCA and will consequently be required to abide by similar rules to mainstream banks – such as carrying out affordability checks on prospective users and giving borrowers access to the FCA's mechanisms for redress and compensation, including the right to complain to the Financial Ombudsman Service about BNPL providers. BNPL provided by merchants will be exempt from the new regime, although the government has said it will keep such merchant BNPL under review. These new rules will bring third party BNPL products in line with other credit products.
Next steps
The UK government intends to lay the draft affirmative statutory instrument (The Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025) before Parliament soon. Thereafter, the FCA will have twelve months to draft, consult on and finalise its rules for BNPL lending. The government's proposed approach involves disapplying certain CCA provisions — particularly those related to information requirements that would otherwise attach to newly regulated BNPL agreements — and instead instructing the FCA to craft a tailored disclosure regime that addresses the specific features of the BNPL product.
Significance
This legislation carries considerable significance in light of the FCA's 2024 Financial Lives survey. Published only a few days ago, the survey found that millions of UK consumers are already in precarious financial positions, with one in ten having no savings. The BNPL sector, meanwhile, has grown substantially in recent years, reportedly adding two million new users in just three years. The industry is keen to ensure that BNPL users are protected on a par with borrowers of other credit products.
Alongside the providers of BNPL products and other stakeholders, the forthcoming BNPL regime also has implications for wholesale lenders, who fund against or purchase BNPL receivables. Such wholesale lenders will want to understand, and ensure adherence to, the new rules for BNPL products. Failure by the relevant originator or servicer to comply with disclosure, affordability checks and other requirements as part of the customer journey might result in borrowers being entitled to seek compensation. This could leave the wholesale lender exposed on a portfolio of BNPL receivables with cash leaking out of the BNPL providers' structures.
On the other hand, the enhanced requirements for affordability checks on underlying customers may give wholesale lenders more comfort on the creditworthiness of the resultant loan portfolios and increase appetite for funding to BNPL originators.
There is also the potential systemic market impact of redress and compensation schemes, something the industry is already grappling with as a result of the recent motor finance commission rulings, see our latest article for more information. The evolving BNPL framework has the potential to reshape the market for short-term lending (in a similar way to payday lending five years ago), with keen interest likely to persist from all participants in BNPL transactions.
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