Buy Now, Pay Later (BNPL) is a form of short-term financing that allows consumers to purchase goods and pay for them over time in instalments. Typically, these services are interest-free if payments are made on time, offering an attractive alternative to traditional credit options like credit cards or personal loans. Despite this, BNPL services operate outside the regulatory oversight of the Financial Conduct Authority (FCA), which has raised concerns about consumer protection.
BNPL options are most commonly available at the point of sale, both online and in-store, allowing consumers to spread the cost of purchases over several weeks or months. It’s simplicity and flexibility have made it particularly popular, especially among younger consumers and those with limited access to traditional credit.
Globally, BNPL services have experienced significant growth. In 2022, the number of users worldwide surpassed 360 million, and projections estimate this figure will nearly triple to 900 million by 2027.
In the UK, it has seen a similar rise in adoption. As of 2024, approximately 50% of UK adults (equating to 26.4 million people) had used a BNPL service at some point, a sharp increase from 36% of UK adults at the start of 2023.
It is likely to be the case that it is in the best interest of consumers’ for the services to come under the FCA's remit to ensure greater safeguards. Currently, BNPL is largely unregulated, raising concerns about consumer protection, transparency, and the potential for financial harm. To address these concerns, the UK government, in collaboration with the FCA, launched a consultation process aimed at implementing appropriate regulations.
The legislation proposes that products offered by third-party lenders will come under FCA oversight, improving transparency and ensuring clearer, more accessible information for consumers. Merchant-provided services, however, will remain exempt for the time being. This term refers to BNPL options offered and managed directly by the merchant in-house, rather than through a third-party lender (e.g., Klarna or Afterpay). These services are exempt from FCA regulation, as they are considered lower-risk and smaller in scale, though this exemption is subject to government review.
Providers will also be required to conduct affordability checks and ensure that all consumer information is presented in a modern, digital-friendly format to align with new compliance standards.
The government is allowing stakeholders to respond to the consultation until 11:59pm on 29 November 2024. After this, the government will review the responses and publish its final policy position. Legislation will be introduced as soon as parliamentary time allows.
Once the legislation is in place, the FCA will review and publish its final rules. Firms will then have a preparation period before 'Regulation Day', during which they must update their practices and processes to comply with the new rules.
To read the full draft legislation, visit here.