FCA proposes ‘creditworthiness test’ for buy now, pay later

The UK Financial Conduct Authority (FCA) is proposing “creditworthiness assessments” for customers of buy now, pay later (BNPL) providers, under a consultation paper published on July 18.

The regulator is aiming for a ‘consumer-focused’ approach, while balancing business interests. In the consultation, it said: “We also want to be proportionate, relying on the Consumer Duty where possible, rather than introducing new rules.

“We also don’t want to impose undue burdens on deferred payment credit (DPC) [BNPL] business models.”

The consultation came after the government passed the enabling legislation (statutory instruments) required to bring the popular form of consumer credit under the FCAʼs jurisdiction on July 14.

To bring the BNPL market under the regulations, the UK government amended the Consumer Credit Act 1974 (CCA) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), which requires the FCA to revisit its Consumer Credit Sourcebook (CONC).

Klarna, the worldʼs biggest BNPL company, welcomed the consultation. A spokesperson told Compliance Corylated: “After five years of constructive work with HMT [HM Treasury], we’re entering the home straight to make BNPL regulation a reality — a major win for UK consumers. We’re looking forward to working with the FCA on rules that protect consumers while keeping choice and innovation at the heart of the UK credit market.”

With the temporary permissions regime, BNPL providers have until July 26, 2026, to become authorised for “relevant consumer credit activities” or have temporary permission, the FCA said in the paper.

Creditworthiness test

Under the proposed regime, BNPL providers are expected to undertake affordability tests of a “sufficiently high standard” to assess the individual circumstances of each case.

“We have seen an example of a minimal assessment being made, which only involved checking if the customer is currently behind with existing repayments with that firm,” the FCA noted.

The consultation also sets out factors that firms must consider, such as the type and amount of credit, its cost and any adverse consequences of missing repayments.

Room for judgement

However, the UK regulator added it will leave some room for firms to use their own judgement and says BNPL providers will be allowed to use a “variety of methods and processes” to confirm creditworthiness. “Our rules allow firms to have a reasonable degree of flexibility in how they assess creditworthiness. There may be multiple ways in which they can comply with our rules,” it said.

Firms may use artificial intelligence (AI) to automate assessment processes. However, the FCA has emphasised they should prioritise “affordability risk” over “credit risk” by using models that are “effective” in producing responsible lending decisions.

The consultation also asks firms whether the creditworthiness rules should apply to lending of £50 or less.

The FCA expects the creditworthiness assessments to reduce consumer access to the product, as well as an increase in consumer caution regarding the ability to afford a BNPL agreement.

A “loss of revenue” for both lenders and merchants using the product is also anticipated, as consumers who lose access to BNPL may turn to other credit products or choose to forgo the purchase altogether, said the FCA.

Australian model

In Australia, the majority of BNPL providers are classified as a form of “low-cost credit” under the Treasury Laws Amendment Act 2024, meaning they are subject to several requirements as “responsible lenders”.

A firm offering a BNPL loan of more than A$2,000 ($1,300) is required to conduct creditworthiness assessments before providing services. The Australian Securities and Investments Commission (ASIC) mandates assessments comparable to those used for traditional credit products, such as low-interest credit cards.

While the Australian regulator allows some exemptions for small BNPL lending below the threshold, it requires a “basic check” into the customer’s financial situation, even for A$100 transactions.