UK Regulation
UK introduces legislation to regulate buy now, pay later
• 0 minute read
May 19, 2025
The UK government introduced legislation to bring buy now, pay later (BNPL) providers under regulation on May 19. HM Treasury has fast-tracked the anticipated timeline, issuing the government response to consultation, proposing the Consumer Credit Act reform and laying the legislation before Parliament on the same day, four years after the UK Financial Conduct Authority (FCA) “urgently” recommended the regulation of BNPL products in the 2021 Woolard review.
“Regulation of the BNPL sector is long overdue, with inconsistent affordability checks and a lack of rules around marketing leaving consumers vulnerable to debt problems while using this type of credit,” said Richard Lane, chief client officer at debt charity StepChange, in a statement.
BNPL products are currently exempt from consumer credit regulations in the UK, prompting both previous and present governments to publish consultation papers in 2021 and, most recently, in October 2024.
Lane added: “For years now we’ve seen first-hand the impact of BNPL services operating unregulated, with people struggling with multiple BNPL debts across several retailers — and often it’s among those who are already in financial difficulty and using credit to make ends meet.”
BNPL products are currently exempt from consumer credit regulations in the UK, prompting both previous and present governments to publish consultation papers in 2021 and, most recently, in October 2024.
Under the proposed regime, BNPL products will be regulated as credit products, requiring mandatory affordability checks, clear repayment terms and strong consumer protections. BNPL providers will also be required to explain clearly “what consumers are signing up for”, including providing payment options that align with consumers’ borrowing capacity, said HM Treasury in a statement.
Klarna welcomes legislation
“Interest-free BNPL is an important alternative to high-cost credit for millions of Brits and we’ve supported regulation to keep it safe and accessible since 2020. It’s good to see progress on regulation,” said a Klarna spokesperson.
Klarna says UK 11 million consumers used its BNPL service in the past 12 months. It claims the past 10 years’ worth of BNPL purchases would have cost consumers half a billion pounds in interest if made on a credit card.
BNPL consumers will also have access to the Financial Ombudsman Service (FOS) to escalate disputes or unresolved complaints, while the FCA will oversight the offering of BNPL products.
Flexibility, convenience, risk
While BNPL products offer flexibility and convenience, especially for those with limited access to credit, they also introduce financial risks that can lead to long-term debt due to misleading late fees and penalties, according to the FCA.
Janine Hirt, chief executive of industry body Innovate Finance, commented: “We remain concerned that BNPL business finance provided to sole traders will be in scope of the regulatory regime. Specialist small business finance providers or wholesale trade suppliers currently offer this but are likely to withdraw such flexible repayment options, reducing sole traders’ access to reliable trade credit products.
“Some firms are concerned by the decision to require domestic premises suppliers to obtain an FCA licence to offer BNPL. Under the Treasury’s rules, a plumber who goes to a family’s home to fix a burst pipe will need an FCA licence to provide BNPL as a payment option. Many of these traders are unlikely to go through this complex licensing process.”
The UK’s consumer finance report highlighted these risks, with credit card debt exceeding £19 billion in February, according to UK Finance. Outstanding balances on credit cards also grew by 5.6% year-on-year, with 48.8% incurring interest recorded in 2025.
“It cannot be right that the family is unable to spread the cost through BNPL, and face the risk of interest if they are left with no choice but to use a credit card. We are pleased to see acknowledgement of this as an issue requiring further work, and look forward to continuing to engage with the Treasury and FCA on this concern,” Hirt added.
Modernising CCA 1974
The UK government is amending the Consumer Credit Act 1974 (CCA) to address the financial risks from BNPL products, which are currently exempt under article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).
The CCA reform aims to “modernise” consumer credit regulations to keep pace with tech-driven credit products, and outlines five main goals to make regulations “proportionate, aligned, forward-looking, deliverable and simplified”.
Phase one of the regime proposes criminal offences and automatic sanctions for non-compliant firms, particularly those that do not give consumers pre-contractual information. In phase two HM Treasury will set out proposals for each consumer right and protection, aiming to identify outcomes to be delivered through the FCA rulebook.
In addition, the government will assess any necessary legislative changes to address the goals, including the RAO, Payment Services Regulations 2017 and Financial Services (Distance Marketing) Regulations 2004.
Exempt: merchant-provided BNPL
The RAO exempts low-risk, everyday transactions involving BNPL and other merchant-provided credit products. Many businesses also use this exemption to offer instalment payments, such as for gym memberships and travel season tickets.
Most respondents to the 2024 consultation expressed concerns about merchant-provided BNPL remaining outside the scope of regulation. With the upcoming legislation, third-party lenders, such as Swedenʼs Klarna and Affirm of the US, will be subject to regulatory frameworks, while merchants offering similar BNPL products could still be exempt.
The respondents, together with consumer groups, also expressed concerns that large e-commerce platforms could offer their own unregulated BNPL agreements at scale, as they had in response to the 2023 consultation.
However, the government said there is currently no evidence of “merchants looking to offer BNPL agreements” on the same scale as third-party lenders. Instead, most merchants continue to partner with these lenders. The government will, therefore, closely monitor them and only respond if potential consumer harm is detected.