The UK government has unveiled long-anticipated legislation that will bring the booming “buy now, pay later” (BNPL) sector under the supervision of the Financial Conduct Authority (FCA), signalling a landmark shift in the oversight of digital consumer credit.
UK brings BNPL firms under FCA scrutiny
For the first time, firms such as Klarna and Clearpay will be legally required to perform affordability checks before offering instalment loans to customers.
The rules will also grant borrowers the right to escalate complaints to the Financial Ombudsman Service — a move aimed at aligning BNPL providers with the same standards applied to traditional credit institutions.
A New Framework
Economic Secretary to the Treasury Emma Reynolds said the new framework would “protect shoppers from debt traps and give the sector the certainty it needs to invest, grow and create jobs.”
Describing the current market as a “wild west,” Reynolds added that regulation was long overdue.
The introduction of this legislation follows years of public and political concern about the risks posed by unregulated BNPL products, which have grown rapidly in popularity.
More than 10 million consumers in the UK now use BNPL to split payments into interest-free instalments, often via online retailers and fintech platforms.
Until now, however, these services operated outside the remit of the FCA, meaning providers were not obliged to assess a consumer’s financial circumstances before issuing credit.
Critics have warned that this regulatory void left users vulnerable to debt cycles, particularly among younger demographics with limited financial literacy.
Consumer advocacy organisations have broadly welcomed the reforms.
Lisa Webb of Which? said that while regulation was a necessary step, the government must also mandate clearer marketing practices and improve public awareness of the potential risks, such as missed payment fees and the impact on credit scores.
BNPL Late Fees
A recent study by the Centre for Financial Capability found that nearly 25% of BNPL loans incurred late fees in the final six months of 2023, underscoring the urgency of consumer protection measures.
Klarna, one of the sector’s largest players, responded positively to the reforms, stating that interest-free BNPL represents a safer alternative to high-cost credit.
“We’ve supported regulation to keep BNPL safe and accessible since 2020,” the company said, adding that it looks forward to working with the FCA to balance innovation with consumer safeguards.
The Treasury also announced plans to reform the 1974 Consumer Credit Act, aiming to create a more modern and flexible regulatory framework that reflects contemporary borrowing habits and the realities of digital finance.
The legislation marks a significant pivot in the UK’s approach to consumer credit, promising not only enhanced consumer protection but also a more predictable environment for fintech innovation and investment.
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