The Impact of Further ‘Buy Now, Pay Later’ Regulation on Businesses

By Erica Paul

The government has recently legislated to bring interest-free “Buy Now Pay Later” (BNPL) loans into the remit of regulation by the Financial Conduct Authority by 2026. As a result, third party lenders such as Klarna and Clearpay will require authorisation to provide these loans and will need to complete affordability checks on customers prior to lending.

What is BNPL?

A 2024 government consultation defined BNPL loans as “a type of interest free instalment credit which allows borrowers to split the cost of purchases into regular repayments not exceeding a 12-month period”. When a customer opts to pay in instalments for a product online, the customer is directed to a BNPL firm, which pays the full amount to the supplier of the goods. The customer then pays the instalments to the BNPL firm. The number of people using BNPL companies has increased in recent years, with 1.9 million adults in the UK using BNPL frequently, compared to 1.2 million in 2022. 

How has the regulation of BNPL loans changed? 

Prior to the 2025 legislation amendment, article 60F of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) exempted BNPL loans from Financial Conduct Authority regulation, as the loan is an interest-free borrower-lender-supplier agreement, requiring all instalments are to be paid within one year. 

This exemption was criticised in the Woodard Review in 2021, as the lack of regulation put consumers at risk of incurring debts that they could not repay, especially as the most frequent users of unregulated BNPL loans were aged 25-34 and living in the most deprived areas in the UK. 

The Woodard Review also identified that the lack of regulation led to the loans being marketed as an alternative payment method for the goods, and companies not completing affordability checks on customers before loaning them money. 

The amendment to the RAO in July 2025 means that interest-free loans from third party companies to be paid in instalments over a year will be regulated. For now, goods suppliers who provide loans will not be regulated under the RAO.

What must BNPL lenders do?

Obtain authorisation from the FCA to provide loans

This authorisation incurs costs for the companies, and they must plan to ensure that they can continue to operate when regulation comes into force in 2026. Firms who do not currently have the correct permissions must pay to enter the Temporary Permissions Regime (TPR) before Regulation Day so that they can provide loans before their application is finalised.

Complete affordability checks on consumers to assess their creditworthiness:

A 2025 government consultation highlighted concerns over customers who had already incurred debts being allowed to pay for more products using BNPL agreements. Credit reference agencies must now conduct checks on customer creditworthiness for every DCP transaction. Lenders will need to create technological systems and install software for these checks and ensure compliance with data protection regulations.

Ensure that the BNPL contract terms are transparent:

Loans companies must ensure that the contract terms visible to the customer at checkout are transparent and comply with section 74 of the Consumer Credit Act 1975, which states that the creditor must not make misinterpretations on a contract “for goods and services financed by a debtor-creditor-supplier relationship”. This means that the contracts must expand on the idea that the loans are” interest-free”, elucidating the high costs associated with late payments. Firms must also comply with the FCA’s Consumer Duty, which ensures that customers with vulnerable needs are accounted for. 

Access to the Financial Ombudsman Service

Consumers will be able to direct complaints to the free-to-use Financial Ombudsman Service, which Parliament established to resolve consumer complaints outside of the court. When the Ombudsman decides in the consumer’s favour, they are entitled to a financial reward against the firm which is fair and reasonable, determined by the Ombudsman. Consequently, more complaints are likely to arise, as it is easier to access the FOS than the courts. The intention is to prompt companies to draft policies that adhere to FCA guidelines.  

Impacts on companies that allow payment via BNPL loans

People who do not pass the creditworthiness assessment will not have access to BNPL, potentially causing fewer sales. 

Sales companies will also have to change their method of advertising the BNPL companies at checkout to ensure that the loans are not advertised as a mere alternative payment method. 

Conclusion

Overall, the FCA regulation of BNPL loans will provide consumers with more protection, especially for vulnerable customers, who cannot repay the debts. For both loan providers and companies providing goods, costs will be incurred to ensure that contract terms are transparent and any complaints that arise can be compensated.